Today, I am looking at Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US), and deciding whether to add the bank to my own stocks and shares portfolio.
Earnings projected to rocket from 2013 onwards
Royal Bank of Scotland has pulled out all the stops since the mire of the 2008/2009 global economic crisis forced its part-nationalisation, and its latest interim statement earlier this month confirmed the heady progress the bank is making in restructuring its operations. Royal Bank of Scotland chalked up pre-tax profit of £1.37bn versus a loss of £1.68bn in the corresponding 2012 period.
The recent appointment of Ross McEwan to replace outgoing chief executive Stephen Hester has also been greeted with optimism that sunnier skies are on the horizon. Indeed, City forecasters expect earnings per share to explode over the medium term, with a 198% increase pencilled in for 2013 to 19p. A further 62% rise is anticipated next year, to 30p.
At face value Royal Bank of Scotland offers increasingly-compelling value for money based on these projections. The bank currently sports a P/E ratio of 18.3 for this year, and which is expected to topple to 11.3 in 2014. And for both of these years the firm boasts a price to earnings to growth (PEG) rating well below the value benchmark of 1 — figures of 0.1 and 0.2 are present for 2013 and 2014.
Many questions still to be answered
Still, I believe that a number of bumps in the road could potentially derail these earnings projections. January-June’s statement revealed that the core continues to struggle, with operating profit here falling 17% during the period to £2.46bn. The bank’s Markets division continues to decline, while its Retail and Commercial arms also continue to struggle to punch a profit.
The cost, as well as revenues, impact of ongoing restructuring also remains uncertain — some £8bn will be spent on this between 2008 and 2014, Investec points out, with a new guidance of £1bn for 2014 having been spelled out in August’s interims.
And for income investors, the sale of the government’s 84% stake in the bank continues to place question marks over the timing of the resumption of its dividend policy, as well as the extent to which potential payments will clock in at — some brokers do not foresee the bank paying out until 2015 at the earliest.
Presently, analyst consensus expects payments to resume next year, although these prospective dividends only currently yield 0.4% and provide slim pickings compared with the wider banking sector’s 4% yield.
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> Royston does not own shares in Royal Bank of Scotland.
