The Royal Bank of Scotland (RBS) is in profit for the third consecutive quarter this year. That's no mean feat given the decade or more of losses since the bank was bailed out by the taxpayer.
But the sword of Damocles hangs over the bank. Investigations by the US Department of Justice (DoJ) over miss-selling mortgage-backed securities in 2008 should give investors pause, as should the potential for further action from UK regulators over its Global Restructuring Group.
There remains the very real possibility that financial penalties could wipe out entirely implied profits this year, and possibly next.
TRADING RECOVERY
As it stands, the troubled lender is on course to make its first full year profit since its bailout. Adjusted operating profit of £1.25bn beat consensus estimates by 18%. Pre-tax profit of £871m is a huge improvement on the £255m profit a year ago, although down from the £1.2bn chalked-up in the second quarter this year.
The core business delivered a return on tangible equity of 15%, annualising earnings per share at 25p for 2017, as well as £5.3bn in excess capital.
But the share price reaction remains muted, nudging 2% higher to 286.8p. That the stock has rallied 28% during 2017, and 19% since early September, hints that a pause for breath is warranted.
SIZEABLE UNKNOWNS
The sedate reaction of investors today makes all the more sense when considering the scale of damages it could yet face. A DoJ penalty in excess of the $6.6bn already set aside has the potential to wipe out any profits this year.
‘Deutsche Bank was fined for similar misdemeanours, and could be as much as $12bn,’ points out ETX Capital analyst Neil Wilson.
There is also the potential for further action from the UK's FCA, which is still looking hard at complaints regarding RBS's Global Restructuring Group's conduct towards small business clients between 2008 and 2013.
RBS has already held its hands up and said it could have done things better but these misconduct issues do raise serious questions over any investment case into the bank.
ANALYST VIEWS
Analysts at Jefferies remain positive on the stock for the time being, pointing towards increasing earnings from retail and commercial lending. It also flags the bank's strong CET1 ratio - the measure of a bank's financial robustness - which increased by 70 basis points in the quarter to 15.5%.
Berenberg, the German investment bank, also highlights ongoing cost savings.
But after three years of £1bn a year cuts, there is only so much fat left on the business, after that you start cutting into operational muscle which could limit RBS's ability to grow.
Berenberg calculates that the shares are worth 275p. Jefferies evidently has a similar abacus - it's target price stands close at 281p.
Yet the known unknowns surrounding RBS right now leave analysts and investors equally in the dark.
