Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) has been called a lot of nasty things in recent years, and rightly so. Liberum Capital’s recent description of the troubled bank as an “ugly duckling” looks relatively mild, especially given recent foul play.
The latest shock is the £3.1 billion provision for mis-selling and litigation costs, announced just before markets closed on Monday evening. Losses for 2013 now look set to total £8 billion, including up to £4.5 billion from the creation of its new bad bank. Ugly is the word.
The losses has knocked the RBS core tier 1 capital ratio from 9.1% at the end of September to between 8.1% and 8.5% today. Markets hated the news, but I’m already over it. The timing of the announcement came as a surprise, but the news isn’t really surprising. I knew RBS was an ugly duckling when I bought it.
RBS has retained its A credit rating, despite the recent shock. Chief executive Ross McEwan is still aiming for 11% core tier ratio by the end of next year. The share price is steady today. Liberum’s prediction that RBS “has the potential to be highly profitable and low risk by 2017” still holds good for me. It rates the bank a ‘Buy’ with a target price of 445p, almost 30% above today’s 332p.
I never expected a quick or smooth transformation in the fortunes of RBS. It will take time to find its rightful place in the world, like the ugly duckling it is. It doesn’t help that Labour leader Ed Miliband has been taking cheap political potshots at it, threatening to impose limits on market share (with reckless disregard for the RBS share price, and the value of the taxpayer’s 81% stake).
Scottish independence adds another layer of uncertainty, given that RBS threatened to decamp its headquarters to London if the Nationalists secure a Yes vote in September. Its decrepit IT systems require major investment, as does its branch network. And investors like me don’t even get a dividend as reward for their patience.
But the sale of its US business Citizens will raise £1.8 billion, which can be repatriated to the UK and used to boost personal and business lending. The toxic assets have mostly been burned off. Earnings per share are forecast to hit a daffy 15% in 2015. By then, the dividend will be back, albeit on a lowly forecast yield of 1.1%. One day, the ugly duckling will become a beautiful swan.
