There are things to love and loathe about most companies. Today, I’m going to tell you about three things to love about taxpayer-owned bank Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US)
I’ll also be asking whether these positive factors make RBS a good investment today.
Swimming naked
Legendary investor Warren Buffett once said: “It’s only when the tide goes out that you discover who’s been swimming naked”. The tide went out big-time with the financial crisis of 2008 — and Royal Bank of Scotland was revealed to be one of the biggest, flabbiest specimens standing shame-faced on the beach. The value of RBS’s assets had to be written down.
The table below shows impairment losses booked by the bank since 2008.
| 2008 | 2009 | 2010 | 2011 | 2012 | |
|---|---|---|---|---|---|
| Impairment losses (£bn) | 7.4 | 13.9 | 9.3 | 7.4 | 5.3 |
Impairments reached a staggering £13.9bn during 2009. The good news is that losses have improved markedly every year since.
Back in the black
Falling impairments have helped RBS to return, finally, to profit. Departing chief executive Stephen Hester told shareholders earlier this month: “RBS Group has earned its first two consecutive quarters of overall profit since 2008”.
City analysts expect the progress to continue, and see earnings per share (EPS) at something over 20p for the current year. That gives a price-to-earnings (P/E) ratio of around 16 at a share price of 326p, in line with the market average. A mid-teens P/E doesn’t scream bargain, but the analysts have pencilled in EPS in excess of 30p for 2014, on which basis the P/E falls to a mere 10.5.
Assets at a discount
Another way to value banks — arguably the single most useful measure — is by tangible net asset value (TNAV). At RBS’s most recent balance sheet date (30 June), TNAV per share stood at 445p. The shares, at 326p, are thus being offered at a 27% discount. Put another way, investors are paying just 73p for every £1 of assets.
A good investment?
RBS’s discount to TNAV and prospective next-year P/E of 10.5 are the kind of numbers value investors look for. Of course, there are always uncertainties when value indicators are flashing. When and how HM Government will dispose of its shares in RBS is perhaps the biggest of all.
However, we’ve seen what can happen — in the case of Lloyds — when the market believes there’s light at the end of the tunnel. Back at the start of 2012 Lloyds’ shares were trading at a 56% discount to TNAV. Today, they’re at a premium of 38%.
RBS is behind Lloyds on the market-sentiment curve, but if it were to be where Lloyds is now, its shares would be trading at 614p — 88% above the current 326p price. As such, I’d say RBS continues to be an interesting recovery stock for investors willing to accept a higher risk for a higher potential reward.
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> G A Chester does not own any shares mentioned in this article.
