RBS shares soar on talk it will make a profit this year

Shares in RBS climbed more than 8% higher after Merrill Lynch issued a bullish note suggesting the signs are now good that RBS could make a profit this year - well ahead of expectations.

That pushed shares temporarily above the 49.9p per share the government paid for shares as it bailed out the bank at the peak of the financial crisis.

With shares now trading just shy of that level, the government may soon begin to test the market's appetite to buy back some shares in the bank as early as this year.

Analysts have become increasingly upbeat about the prospects for RBS since it reported better than expected profits earlier this year.

Today, Merrill Lynch banking analyst Michael Helsby said RBS can turn a profit in 2010, lifting shares to a high of 50.11p.

'We still believe RBS is one of most geared banks into recovery in Europe. We think it can turn a profit in 2010 and that profitability can recover strongly thereafter driven by rising margins, tight cost control and falling bad debts.'

Helsby has lifted his forecast for underlying profit before tax by 12% for 2011 and 6% for 2012 and thinks RBS can earn earnings per share of around 8p per by 2012. Helsby’s prediction is around 60% above the consensus for 2012.

UK peer Lloyds - 41% owned by the state - has already issued an upbeat outlook statement saying it is now confident it can make a profit this year.

But while the strength in RBS shares today might add to suggestions that the government may be keen to sell its shares in the bank as soon as possible, any decision to sell out of the banks entirely may draw criticism if market watchers believe the government is missing out on a bigger profit if it held fire.

Helsby said he has lifted his 12 month price objective to 65p from 45p and thinks earnings upgrades and disposals will mean shares could double in value to 85p over a two year time-frame.

Reports last week suggested the Conservative Party is keen to sell shares - at a discount - in 2011.

Investors have been hoping the government would begin to sell shares in Lloyds ever since the taxpayer made a profit on its holding in the group - now 41% owned by the taxpayer - back at the end of March.