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Eyes Down for Royal Bank of Scotland Group plc (ADR) (RBS)’s Results

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RBS Rolls Out Five Rogers Enhanced Commodity ETNsLONDON — Royal Bank of Scotland Group plc (ADR) (LSE:RBS) (NYSE:RBS) is due to announce its annual results on Feb. 28. At the time of writing, RBS’s shares are trading at 346 pence – up 23% from a year ago compared with a 6% rise in the FTSE 100.
Analyst consensus forecasts
“Consensus forecast” has a reassuring ring about it, seeming to suggest that the City is in broad agreement about what numbers the company will be coming out with. And in fact, it is often the case that most analysts’ individual forecasts are clustered fairly closely around the consensus.
However, on some occasions it behoves commentators like me to tell you that the consensus is all but meaningless, particularly when it comes to the earnings-per-share forecast. RBS is a case in point.
The consensus EPS forecast provided by Morningstar, for example, is 10.9 pence. But the range of forecasts stretches from 22.5 pence to -31.3 pence! Only one analyst — at 6.6 pence — is anywhere near Morningstar’s “consensus.” The rest are either way above or way below. In other words, there is no consensus.
So, if nothing else, this preview of RBS’s results can serve as a warning to you that sometimes if you read that Company X is cheap/expensive because it’s on a forecast price-to-earnings ratio of “n,” you can take the valuation with a pinch of salt.
Historic EPS
If consensus earnings forecasts are sometimes little short of nonsense, are we better off valuing a company on historic EPS. Take your pick from the five EPS versions RBS provided in its results last year.
Statutory EPS -1.8 pence
Adjusted EPS 0.2 pence
Core adjusted EPS 0.7 pence
Pre-impairment core adjusted EPS 1.2 pence
Core adjusted EPS assuming normalized tax rate 4.1 pence

Did I leave out the “Adjusted-to-produce-an-even-higher-EPS” number? OK, so that’s a joke. These various numbers are helpful to analysts who study the minutiae of RBS’s accounts, but how useful are they to humble private investors like us?

Tangible net asset value

I’d suggest you forget earnings when you look at RBS’s upcoming results and concentrate instead on the tangible net asset (TNAV) per share number.

In my view, TNAV is the single most useful valuation number for banks at all times, but perhaps especially when they’re recovering from a financial crisis and earnings are all over the place.

The table below shows RBS’s TNAV per share at the end of each quarter since last year.

Dec. 31, 2011 March 31, 2012 June 30, 2012 Sept. 30, 2012 Dec. 31, 2012
501 pence 488 pence 489 pence 476 pence ?

In terms of valuation, at a share price of 346 pence RBS is trading at a 27% discount to TNAV per share on the Q3 balance sheet date of Sept. 30. The TNAV is, of course, five months out of date now, so the updated number in the upcoming results will give us an improved handle on the level of the discount at which the shares are trading.

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