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Friday's agenda: RBS split decision possible with IMS

Last updated: 17:30 31 Oct 2013 GMT, First published: 18:30 31 Oct 2013 GMT

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Royal Bank of Scotland (LON:RBS) will continue the banking sector’s third-quarter reporting season on Friday but an expected return to profit by the taxpayer-backed lender is likely to be overshadowed by speculation about a potential break-up of the bank. 

The market’s consensus forecast is for RBS to report third-quarter profits of around £440mln, reversing a loss of £1.2bn seen at the same stage last year, in the first set of results overseen by new chief executive, Ross McEwan.

The headline numbers, though, are likely to be hit by several one-off charges related to recent loss-making disposals, and the bank could also announce a further provision for payment protection insurance (PPI) mis-selling, just as Lloyds Banking Group (LON:LLOY) did earlier this week.

However whispers suggest that the UK government will also announce the completion of a review into the separation of RBS into a ‘good bank’ and a ‘bad bank on Friday, which could overshadow the results. 

Investec Securities on Thursday noted recent media reports suggesting that the outcome of the government’s review will be announced tomorrow.

“Obviously we don't know the outcome, but we are inclined to believe that the scale of immediate overt value destruction, that we think could send the RBS share price straight below £3, will be avoided,” Investec analysts said in a note, believing Chancellor George Osborne will recognise the negative implications of such a course of action.

However the broker said it still fears that even in the absence of an outright good bank/bad bank split, more covert government steps in the future may still destroy value for shareholders, and it concluded that it would still avoid RBS shares.

Insurer Direct Line (LON:DLG), which was spun-out of RBS in October last year, will also issue a third-quarter trading update on Friday. RBS also placed a further 300mln shares in Direct Line in September, reducing its remaining holding to 28.5% from 48.5%.

UK motor and home insurance markets remain highly competitive and premiums have been falling, and while there have been initiatives to reduce claims, motor insurers are still seeing rising claim costs.

While progress has been made in identifying cost savings at Direct Line, which are on track to be met, a lack of top line growth, softening rates, and an increasingly competitive market do not bode well for the firm in the long-term, analysts at Oriel Securities said.

 

Significant announcements expected 


Companies: IMS: Royal Bank of Scotland, Direct Line, DS Smith, Meggitt, F&C Asset Management

 

Macroeconomic: UK: October Manufacturing PMI. US: ISM Manufacturing Index, FOMC Member James Bullard speaks


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