Why Royal Bank of Scotland Group plc Should Be A Winner Next Year

I’m checking on forecasts and prospects for 2014 for some of our top companies, and today my attention is turned to the bailed-out Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US).

Here’s RBS’s recent performance, together with current consensus forecasts for this year and next:

And, well, we all know how bad it’s been, with 2008 resulting in a net loss of £24bn — the biggest loss in UK corporate history — under the guidance of the now-legendary Fred The Shred. I won’t add up the total losses, as it’s just too painful — you can do that yourself if you have the necessary iron constitution.

But the point is, there’s an end in sight, and 2014 should finally be a good year — there’s the first pre-tax profit since the disaster expected, along with worthwhile earnings per share, and a dividend! Sure, the dividend is only set to yield a puny 0.2%, but anything is better than nothing.

The share price

 So what’s been happening to the share price? Have a look at this:

Now that is not good.

But if we look at more recent movements, the RBS price is actually up around 11% over the past 12 months — still a bit below the FTSE, but not too bad. And over the past two years, we’ve seen a gain of better than 40%.

Not out of the woods

Despite the turnaround that appears to be on the cards, there are still some pretty scary risks facing RBS shareholders. The bank is fencing off the worst of its bad loans into an internal “bad bank”, and the worrying thing is that the percentage of its loans in arrears by more than 90 days is rising instead of falling — by September the figure was up to 9.4%, from 9.1% at December 2012.

The bad bank is forecast to be managing the run-down of £38bn in bad loans by the end of this year, of which nearly half are in arrears — RBS hopes to get them all off its books within three years. Some provision for these bad debts has been made, but the amount still to be written off is a big unknown.

Forecasts

Having said that, how realistic is the current analysts’ consensus for a £1,585m pre-tax profit for 2014?

Well, at Q3 time the bank told us its Core Tier 1 ratio was up to 11.6%, or 9.1% on a fully-loaded basis — and it has set a fully-loaded target of around 11% by 2015 and 12% or better by 2016.

The firm did record a pre-tax loss of £634m for the quarter, but that included a £496m accounting charge — there was an underlying operating profit of £1,283m.

RBS also made £15bn in new business loans in Q3, and told us that credit demand is improving with a 6% rise in loan and overdraft applications from SMEs during the quarter.

 All in all, things are moving back in the right direction.

Verdict: A cautious thumbs-up for 2014!