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Will Royal Bank of Scotland Group plc follow Barclays plc higher in 2017?

Image: Royal Bank of Scotland. Fair Use.

Will 2017 be the year when Royal Bank of Scotland Group (LSE: RBS) finally starts to deliver a sustainable, profitable recovery? Since hitting a high of 403p in 2014, the bank’s share price has halved to its current level of 200p.

However, as I’ll explain, I believe there are good reasons to think the outlook for the bank may start to improve in 2017.

Patience rewarded

An obvious comparison is with Barclays (LSE: BARC). While RBS and Barclays have slightly different business models, both have been slow to escape from problems caused by the financial crisis.

Both banks have faced high levels of misconduct charges. Both banks have problematic portfolios of non-core assets, which must be sold. Both banks have taken longer than expected to deliver promised improvements to shareholders.

However, after a long run of earnings downgrades, analysts have recently upgraded their 2016 profit forecasts for Barclays. The bank’s focus on US-UK banking appears well timed, and the weaker pound has helped to boost profits from US operations.

With a 2017 forecast P/E of 11, Barclays looks attractive to me.

Stress test failure isn’t all bad

Last week’s Bank of England stress test failure must have been embarrassing for RBS management. The group was the only big UK bank required to submit a new plan to the BoE to address its capital shortfall. However, the news may not be as bad as it seems.

One of the bank’s main problems was said to be that it’s expected to face a fine of up to $12bn, relating to mis-selling allegations in the USA. The good thing about this case is that it relates to the bank’s past activities, not to its current operations. It will eventually be settled.

A good bank in hiding?

The other big problem facing RBS is its portfolio of non-core assets, which the group is trying to dispose of. Progress has been steady this year. The total value of these assets has fallen by £10.4bn to £38.6bn so far in 2016.

Supporting this lossmaking division are RBS’s core UK banking operations. These generated an adjusted return on tangible equity of 12% during the first nine months of the year. To put this in context, the equivalent figure for the whole of RBS was -0.6%. It’s clear that if RBS could get rid of some of its problem assets, the bank’s core operations could deliver attractive returns.

Is it really that simple?

One challenge I haven’t mentioned so far is that 72% of RBS shares remain in the hands of the Treasury. The bank is still effectively controlled by the taxpayer.

It’s not yet clear what Chancellor Hammond’s approach will be to selling the government’s shares. But his comments so far suggest he is keen to bring the bailout to an end. I suspect that the government might start selling its stake once RBS has settled its outstanding legal cases.

3 reasons for RBS to rise

Markets hate uncertainty and delays. RBS has delivered both in recent years. But I can see this situation changing in 2017.

If RBS can continue to sell its unwanted assets, settle its legal cases and convince regulators that it doesn’t need to raise any further capital, then investors may start to take an interest.

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Roland Head owns shares of Barclays. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.