Why I Believe Royal Bank Of Scotland Group plc Is A Terrible Growth Candidate

Royston Wild explains why Royal Bank Of Scotland Group plc (LON: RBS) is a poor earnings selection.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today I am explaining why I believe Royal Bank Of Scotland (LSE: RBS) (NYSE: RBS.US) is a perilous pick for seekers of long-term earnings growth.

Earnings volatility predicted to reign

Royal Bank of Scotland has hardly been a convincing pick for those seeking long-term dependable earnings growth in recent times. Despite a programme of aggressive de-risking through ongoing asset sales, not to mention a further bolstering of the balance sheet by enscotlandgaging in extensive cost-cutting across the business, the company has still failed to punch two years of consecutive growth since the 2008/2009 banking crisis ripped out the bottom line.

The City’s number crunchers believe that Royal Bank of Scotland’s hard labours — combined with the run-off of various legacy issues — are set to deliver a meaty improvement this year, and expect the company to swing from losses of 38.3p per share in 2013 to earnings of 28.9p per share.

But beyond this year many analysts believe that the rapid descaling of the business is likely to weigh heavily on the bank’s growth prospects in coming years, and anticipate a 2% decline next year to 28.4p per share.

A dear pick for diddly earnings growth

Indeed, the firm’s aggressive departure from what it deems non-core businesses and refocus on the its UK retail operations continues to drive revenues through the floor, and total income slipped almost 10% during April-June to £5.4bn.

As well, Royal Bank of Scotland is also set to keep on shelling huge sums for a variety of misconduct issues, and Investec expects the bank to incur an additional £3.6bn worth of incremental charges through to 2016. But with new cases continuing to emerge — such as recent claims that it sold junk mortgage bonds from 2004 to 2010 — it is impossible to put a cap on possible litigation charges.

Given current earnings forecasts, Royal Bank of Scotland can hardly be described as irresistible value for money. The firm currently deals on P/E multiples of 12.4 times and 12.6 times prospective earnings for 2014 and 2015 correspondingly, comfortably above the bargain yardstick of 10 times which I believe it should be camped under given its meagre growth prospects and ongoing legacy issues.

And investors can also find better value from fellow UK banking stalwarts Lloyds Banking Group, Barclays and HSBC, which carry forward multiples of 9.8, 11.2 and 12.1 correspondingly and have far better earnings potential in my opinion.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »