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

LONDON — 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.

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.

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 The TNAV is, of course, five months out of date now, so the updated number in the upcoming results will give us an improved handle on the level of the discount at which the shares are trading.