Today I am detailing why I believe shares in Royal Bank Of Scotland (LSE: RBS) (NYSE: RBS.US) are grossly overvalued following recent price spurts, leaving the stock in severe jeopardy of a painful collapse.
Risks outweigh rewards at current prices
Although shares in part-nationalised banking leviathan Royal Bank of Scotland have been put in an erratic performance so far in 2013, the stock has absolutely exploded in recent months, rising more than 35% since July and striking two-year peaks around 385p in the process. However, in my opinion these giddy price levels do not reflect the inherent risks still affecting the business, exemplified by a lofty prospective P/E rating of 22.1.
Most worryingly, Royal Bank of Scotland continues to face the prospect of continuing troubles across the core, particularly at its critical Markets, division, and broker Investec expects enduring woes here to keep the firm’s core operations under pressure well into the future.
“We anticipate no relief here in [quarter three] where we expect the division to barely achieve break even, and our expectation of slightly lower incremental losses in Ulster Bank, coupled with a modest recovery in UK Retail (reflecting both volume and margin recovery) is insufficient to offset this.”
As previously mentioned, Royal Bank of Scotland currently deals on a P/E readout of 22.1 for 2013, based on current City earnings projections. substantially higher than the benchmark of 10 which represents decent value for money.
On top of this, the bank’s current reading is comfortably beaten by the forward average of 16.9 for the wider FTSE 100. And Royal Bank of Scotland is also comfortably outstripped by a number of its banking rivals that yield much more attractive earnings prospective — HSBC, for example, was recently dealing on a forward P/E multiple of 11.2, while Barclays currently carries a corresponding readout of 10.7.
The market has been cheered in recent months by the installation of new chief executive Ross McEwan, seen as a watershed moment in the firm’s turnaround story. Still, with questions also abounding over the unwinding of the government’s 84% holding in the bank and the conclusion of the firm’s various PPI mis-selling scandals, I believe that there are many more attractive stock selections available at present.
