Investors in the banking sector have experienced a highly challenging few years, with banks such as RBS (LSE: RBS) (NYSE: RBS.US) still being valued at a fraction of their pre-credit crunch levels. Indeed, RBS has shown little sign of improvement during 2014, with shares in the part-government owned bank being down around 3%, while the FTSE 100 is flat over the same time period.
However, the fortunes of the banking sector, and of RBS in particular, could be about to change.
A Return To Profitability And Growth
After recording some of the biggest losses in UK corporate history, RBS is set to return to profitability in 2014. Although levels of profit remain a long way behind their pre-credit crunch levels, earnings per share (EPS) of 23.8p that are forecast for this year are a good starting point from which RBS can increase the bottom line. On this front, RBS is set to deliver earnings growth of 15% next year, which is roughly twice that of the FTSE 100 and shows that a reduction in asset writedowns and (potentially) lower PPI provisions could make a big impact on profitability going forward.
A Sound Strategy
Although RBS changed its management team last year (with Stephen Hester leaving and Ross McEwan taking over), RBS continues to adopt the same strategy as it has done in recent years. This is fairly simple in theory, but difficult to execute, as RBS seeks to reduce the size and risk of its balance sheet through shedding assets that require relatively large amounts of capital, that produce relatively low returns and whose risk profile is not particularly attractive. With non-core assets being reduced significantly in recent years, the aim of de-risking RBS’s balance sheet looks set to be completed shortly. This is good news for investors, as asset writedowns have had a devastating effect on the bottom-line.
Looking Ahead
Clearly, improvements in the outlook for the UK (and world) economy are good news for RBS. However, they don’t seem to be fully priced in yet, since RBS trades on a price to book ratio of just 0.35. This is extremely low and shows that RBS offers good value for money at current price levels. With profitability due to return this year and set to grow at a brisk pace in future, RBS could prove to be a strong long-term performer and could, therefore, help to pay off your mortgage.
