When I think of banking company Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company attractive as an investment proposition.
1) Discount to assets
When it comes to investing in banks, one condition that I look for above all others is a discount to net asset value. Royal Bank of Scotland has that. At a share price of 305p, the discount is running at about 16%. So, does that make Royal Bank of Scotland a buy? Maybe, but it’s best not to judge using that measure alone.
It’s worth looking at the firm’s record on net asset value:
|
Year to December |
2009 |
2010 |
2011 |
2012 |
2013 |
|---|---|---|---|---|---|
|
Net assets (£m) |
94,631 |
76,851 |
76,053 |
70,448 |
59,215 |
The firm has been busy extricating itself from a quagmire of gone-bad lines of business around the world and the result is a shrinking asset base. So, perhaps that discount to net asset value is justified, for who knows how much further assets must shrink before Royal Bank of Scotland’s activities become stable and viable for the long term?
That said, I’m happier with a discount to net assets than I would be without one.
2) Recovery potential
Taking the plunge with RBS now involves an act of faith that the worst of the firm’s excesses have been purged. Five years ago, RBS started a strategic restructuring programme designed to correct business- model gaffs that left the firm naked when the 2008 financial crisis struck. The directors took a chainsaw to the balance sheet carving about £1 trillion from it, which suggests that the firm had racked up some serious gearing.
Royal Bank of Scotland bubbled up to such a size and complexity that it risked bringing down the UK economy, so no one was prepared to see it fail. The government still owns most of the company now, and RBS has already repaid billions of pounds of Government funding support.
Having bailed out the bank in such a huge way, it’s no wonder that Britain’s tax-paying public has been so enraged by the string of conduct-related issues that have emerged since the financial crisis such as LIBOR, PPI, interest rate swaps and RMBS litigation. Indeed, RBS was a cyclical that came down so hard on the last down-leg that, by rights, it shouldn’t have walked away from the impact. Having done so, it’s not polite to pick-pocket the paramedic-team that saved it!
Going forward, RBS’s new CEO, Ross McEwan, is tasked with steering the firm into calmer waters now that it has stopped trying to shoot the rapids. The chairman reckons the company must build a bank that earns its customers’ trust, improves operating efficiency and can move down the path back to full private ownership. If RBS can pull-off those goals, the firm could be something of a recovery investment, although most of the big annual share-price gains look done, to me, at least in this macro-economic cycle.
What now?
Banks like Royal Bank of Scotland are less attractive than they were a few years ago, around 2009. I think there’s still mileage in investing in RBS, but banks can be such complex beasts to analyse that it’s hard to ensure that we are buying good value.
