Will Royal Bank Of Scotland (RBS) Dip Post Q3 Earnings?

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Will the upcoming earnings release put further pressure on RBS stock? It depends largely on whether the company is able to report improved results this earnings season.

RBS, which was bailed out with £45 billion by the British government in 2008, has been striving for growth with several restructuring initiatives, including cost-reduction measures, reducing geographic footprint and capital build-up efforts, while remaining focused on its strategy to become a smaller and simpler bank.

The bank’s ability to cope with broader industry challenges amid its overhauling moves remains a key area to watch this earning season.

Factors to Influence Results

The Edinburgh-based banking giant has experienced decline in net fees and commissions in the recent quarters, and we do not expect this quarter to show substantial strength. Further, profitability of the bank should suffer given its moderate exposure in the weak industries – oil & gas, metals & mining and shipping.

Global bank’s revenues from advisory and underwriting have not recorded significant improvement, as M&A activities and IPOs continued to decline during the third quarter in the wake of global economic concerns. RBS, which is already downsizing its investment banking division, is likely to witness a decline as well.

As the bank remains focused on expediting its ongoing overhaul, the quarterly results will be affected by further significant restructuring charges. Also, given RBS’ exposure in numerous lawsuits and investigations, the company might have kept additional reserves for litigation expenses, which could dampen the bottom line to some extent.

However, expense base may get some ease owing to RBS’ continued cost-control efforts. Also, the company might have benefited from the ongoing economic recovery (albeit at a slow pace) in the U.K. and Ireland – the major domestic markets. Growth in core U.K. loan business, particularly in the mortgage space, could act as a positive, which should improve the company’s interest income.

As RBS continues to make investment in its core businesses to boost performance, the quarterly results might get support to some extent.

Furthermore, net interest margin is expected to increase partially, reflecting the consistent benefit from reductions in the low yielding non-core assets.

Capital efficiency is the key to survival and most foreign banks have been adopting reconstruction-by-asset-sale strategies to strengthen capital ratios. While this will make their business safer, growth prospects remain unimpressive with decreasing sources of income. Notably, RBS is likely to exhibit further reduction in risk weighted assets in the upcoming release.

RBS currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other foreign banks, UBS Group AG (NYSE:UBS) is scheduled to report results on Oct 28, while Itau Unibanco Holding S.A. (NYSE:ITUB) and Mitsubishi UFJ Financial Group, Inc. (NYSE:MTU) are expected to release on Oct 31 and Nov 14, respectively.