Why Divestments Seriously Undermine Royal Bank of Scotland Group plc’s Growth Prospects

Royston Wild looks at why Royal Bank of Scotland Group plc’s (LON: RBS) rolling disposal programme is set to crimp earnings.

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Today I am looking at why I believe in Royal Bank of Scotland‘s (LSE: RBS) (NYSE: RBS.US) continued purse-tightening is set to constrain long-term growth.

Asset shedding rattles growth potential

Following Royal Bank of Scotland’s humiliating taxpayer bailout in the wake of the 2008/2009 financial crisis, the bank has embarked on an intensive downsizing and cost-cutting drive in order to repair its battered balance sheet and cut out unnecessary wastage.

Such measures are undoubtedly a necessity given the state of the firm’s capital position. And under the guidance of new chief executive Ross McEwan, the bank has promised to accelerate non-core divestments this year and beyond, following up from the £29bn worth of sales clocked up in 2013.

Royal Bank of Scotland announced plans to sell its remaining 28.5% holding in home and motor insurance giant Direct Line Insurance rbsGroup in February. The decision came as somewhat of a surprise to City commentators, and again raised the question over the scale of its asset disposals, not to mention whether the company should be divesting some of its higher-quality assets.

Indeed, broker ETX Capital commented following February’s decision that “RBS shareholders may express disappointment as Direct Line, for some, would be seen as a business to hold on to,” even if such divestments could be viewed as essential for the bank to achieve full privatisation once again.

Other assets due to go under the hammer include US-based consumer bank Citizens Financial Group, which Royal Bank of Scotland views as the “cornerstone” of its capital recovery plan. The company is aiming to get its Basel III Tier 1 capital ratio to 12% by 2016, a massive task given that the figure currently stands at 8.6%, one of the worst among the banking sector.

A risky pick despite touted near-term recovery

Royal Bank of Scotland has seen growth fluctuate wildly in recent years, the bank punching losses in three of the past five years as the firm’s bailout by the UK taxpayer has failed to generate the same sort of success as that of Lloyds Banking Group.

City analysts expect the firm’s fortunes to turn around from this year, however, with Royal Bank of Scotland expected to snap back from losses of 38.3p per share to record earnings of 23.6p. And the company is anticipated to follow this with a 12% advance to 26.4p in 2015.

Still, in my opinion the speed and extent to which Royal Bank of Scotland is shedding assets to remedy its near-term financial ills makes worrying reading for its future growth prospects, particularly as its critical investment bank is ready to bear the brunt.

With bad debts and legacy issues in the courts adding to the bank’s woes, I believe that Royal Bank of Scotland remains too risky a stock selection at the current time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston does not own shares in any of the companies mentioned in this article.

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