Will Royal Bank of Scotland See Its Stock Rise?

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With shares of Royal Bank of Scotland (NYSE:RBS) trading around $10, is RBS an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Royal Bank of Scotland is a global banking and financial services group that operates in the United Kingdom, the United States, and internationally through its two principal subsidiaries: The Royal Bank of Scotland and National Westminster Bank. In the United States, the subsidiary of the Royal Bank of Scotland, Citizens Financial Group, is a commercial banking organization. The company includes business segments of UK Retail, UK Corporate, Wealth, Global Transaction Services, Ulster Bank, US Retail & Commercial, Global Banking & Markets, RBS Insurance, Central items, and Non-Core Division and Business Services.

Royal Bank of Scotland has named Ross McEwan as its new CEO. McEwan will replace Stephen Hester on October 1, as the bank continues to face pressure to downsize from the British government. The government is pushing RBS to consider breaking up, as it attempts to get back some of the 45.5 billion pounds it spent on the bank’s bailout. The bank presented a lackluster earnings report, with profit at RBS’s core businesses falling 17 percent.

T = Technicals on the Stock Chart are Mixed

Royal Bank of Scotland stock has remained stagnant over the last several years. The stock is now trading near the middle of a range that extends through most of this year. Analyzing the price trend and its strength can be done using key simple moving averages.

What are the key moving averages? They are the 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Royal Bank of Scotland is trading between its key averages, which signals neutral price action in the near-term.

RBS

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Royal Bank of Scotland options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Royal Bank of Scotland Options

34.10%

0%

0%

What does this mean? This means that investors or traders are buying a very minimal amount of call and put options contracts, compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Steep

Average

September Options

Steep

Average

As of today, there is average demand from call buyers or sellers, and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very minimal amount of call and put option contracts, and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates, and what that means for Royal Bank of Scotland’s stock.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. In addition, reactions to the last four quarterly earnings announcements can help gauge investor sentiment on Royal Bank of Scotland’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Royal Bank of Scotland look like, and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

123.48%

-47.56%

-216.31%

50.87%

Revenue Growth (Y-O-Y)

22.85%

61.81%

-41.14%

-28.28%

Earnings Reaction

-0.38%

0.00%

1.17%

-0.42%

Royal Bank of Scotland has seen mixed earnings and revenue figures over the last four quarters. From these numbers, it seems the markets have had mixed feelings about Royal Bank of Scotland’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Royal Bank of Scotland stock done relative to its peers, Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), and the overall sector?

Royal Bank of Scotland

Bank of America

JPMorgan Chase

Citigroup

Sector

Year-to-Date Return

-7.79%

27.73%

28.25%

33.92%

20.48%

Royal Bank of Scotland has been a poor relative performer, year-to-date.

Conclusion

Royal Bank of Scotland is a provider of financial services to consumers and companies around the world. A new CEO has been appointed for the company, which may offer some positive change. The stock has not moved much in the last few years, and is now trading in the middle of this year’s range. Over the last four quarters, investors in the company have had mixed feelings about the company, as earnings and revenue figures have been fluctuating. Relative to its peers and sector, Royal Bank of Scotland has been a poor year-to-date performer. WAIT AND SEE what the company does this coming quarter.

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