Regular readers of the Fool will know that I am a strong advocate of investing in financials. I have written about why banks such as Lloyds and Barclays are buys. I have also written about the merits of investing in insurers and brokers. But what of Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US)?
Of all the big banks, RBS has suffered the most from the credit crunch and the Great Recession. It has been a terrible few years for the firm, after the ill-timed takeover of ABN Amro, and the massive bad debts that the company racked up.
Negatives
The result has been a bank that has been heavily loss-making, has lost thousands of jobs, and that remains state-owned.
But there are tentative signs that the company is on the mend. The company is at last turning a substantial profit.
The thing about contrarian investing is that you need to buy into companies that are out of favour, and are often in the depths of trouble, but which may just be on the cusp of recovery.
Contrarian investing is not easy. Buy in once the business has already recovered and you will miss out on much of the share price increase. But buy in too early, and you may find yourself saddled with a share that underperforms for years.
All the talk about RBS over the past few years has been remorselessly negative. Yet, gradually, we are seeing a bank shedding its legacy assets, and turning around its core businesses. We are seeing a bank which is more focused and more modest in its ambitions.
Positives
Want positives? Here are some positives: impairment losses are falling, apart from Ulster Bank all divisions of the company are now profitable, and the cost base continues to be reduced. The mortgage business will profit as the housing market improves. The investment bank will profit as stock markets rise. And the retail and consumer bank will profit as economic and business confidence surges.
I am not worrying about whether RBS will be split into a ‘good bank’ and a ‘bad bank’. Whichever path is chosen, the bad bank’s troubles will still need to be resolved.
Foolish bottom line
In conclusion, then, in the long term I am hopeful of a good future, if not a return to boom, for RBS. Of course, the company still has a bumpy road to travel to reach this point. But my gut feel is that this might just be the “time of maximum pessimism” that John Templeton would often talk about.
So I would say that RBS is a buy for the brave, and a buy for the patient, but a buy nonetheless.
RBS is definitely an investment for the long-term. If you are looking for more investments that will stand the test of time, then I would recommend that you read our latest report.
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> Prabhat owns shares in Barclays, but in none of the other companies mentioned in this article.
