In recent years, UK banks have become unlikely fans of value investing, boasting of their net tangible asset value per share at every opportunity.
The biggest advocate of this approach has been Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US), probably because it has had little else to boast about. After all, since 2008, it has logged more than £30bn in losses, and has been 82%-owned by the government: not a very appealing proposition for investors.
Until recently, I’ve been a supporter of the asset-based investment case for RBS, but now that the bank is expected to return to profitability this year, I’m no longer convinced.
It’s time to look at earnings
At the end of June, RBS’s tangible net asset value per share was 445p, which means that the bank’s shares currently trade at 84% of their tangible book value — a big discount for a FTSE 100 firm.
However, if you value RBS using its prospective earnings, it starts to look pretty expensive. Based on City analysts’ consensus forecasts, RBS has a 2013 forecast P/E of 20, and a 2014 P/E of 12.8. No dividend payment is expected before next year, at the earliest.
In my view, this valuation isn’t very appealing, given that Barclays also trades below tangible book value, has a forecast P/E of just 9.1, and offers a prospective yield of 2.4%.
Sell-off unlikely before 2015
The government has already started to sell its 38% stake in Lloyds Banking Group, but is not expected to start selling its stake in RBS before the next general election, in 2015.
This increases the risk that political interference will change the underlying investment case for RBS. The government already has a track record of interfering with the bank, and the Chancellor recently commissioned a review to look at whether RBS should be split into good and bad banks.
Whatever the outcome of the review, I wouldn’t bet against future political meddling — and it’s also possible that dividend payments won’t be allowed until the bank returns to private ownership, in order to keep voters happy.
Limited upside
RBS shares have risen by 110% since they hit a post-crisis low of 187p in November 2011. In my view, further gains could be a long time coming, and now could be the right time to sell and lock in profits, ahead of an uncertain future.
