2014 has not been a great year for RBS (LSE: RBS) (NYSE: RBS.US), with shares currently down over 10% while the FTSE 100 is down less than 3%. However, developments outside of RBS could prove to be catalysts for the share price of the majority government-owned bank.
The Industry
Indeed, recent ongoings at The Co-Operative group highlight just how difficult it is to compete with established players in the banking industry. The barriers to entry are extremely high and, although banks such as Metro Bank and Virgin Money have had some success with regard to their product offerings, the UK banking scene remains dominated by a handful of major players, of which RBS is one.
These high barriers to entry mean reduced competition, which leads to a more favourable trading environment for incumbents. The demise of Co-Op bank means that there is one less entity with which to compete and what could have been a considerable threat to existing players now looks set to be a far less scary proposition. As a result, profitability for banks such as RBS should be aided in future.
Government Stake
Shares in sector peer Lloyds have had a great twelve months, posting gains of 55% while RBS is up just 8% over the same time period. One reason for this is that the government has started selling off its stake in Lloyds (more was sold just this week) and the market has reacted positively to this. Although RBS may be some way off the financial health of Lloyds, it is on the right path in terms of asset base strength and profitability. This means that the government is likely to start selling its stake during the next parliament, with the market likely to receive such news favourably and as a sign that things are looking up for RBS.
Good Value
Trading on a price to earnings (P/E) ratio of 12.7, RBS looks good value when compared to the FTSE 100’s P/E of 13.2. This, combined with the lack of competition due to high entry barriers and the problems at Co-Op bank, mean that shares could have a good future. Furthermore, if the market receives news of a sale of the government position as well as it has done for Lloyds, then RBS could prove to be a winner.
