Royal Bank of Scotland (LSE: RBS) is the poster child of all that went wrong in the financial crisis, and the bank has taken longer to recover than almost any other business affected.
2018 was the first year in a decade that the bank returned to profit, generating attributable earnings of £752m for the full-year, significantly better than the £592m loss expected by analysts and far better than the attributable loss of £7bn reported for 2016.
However, while there is some light at the end of the tunnel for RBS, the bank still has a considerable amount of work to do before it’s in the clear. There are still multi-billion-pound mortgage litigation suits to settle with the US Department of Justice, and last month the bank was accused of “certain widespread inappropriate treatment of SME customers” in a Treasury select committee report. This is just one of the many reasons why the bank was forced to set aside another £764m for conduct and litigation charges in the fourth quarter.
And it looks as if shareholders are going to have to wait for a few more years before they see a return from RBS’s shares as, until the full impact of the DoJ settlement is known, management is unlikely to announce a dividend.
So, as RBS continues to deal with the fall out of its part in the financial crisis, I believe investors would do well to avoid the business and instead commit their cash to one of the firm’s banking sector peers.
Strictly speaking, Equiniti (LSE: EQN) isn’t a bank but it does work in unison with many of them, providing complex administration and payments services. It also administers the shareholder services for around half of the FTSE 100 constituents.
According to the company’s full-year 2017 earnings release, which was released today, Equiniti managed to retain all of its FTSE 100 clients last year and added several new businesses to its registration business including Howdens Joinery, Jardine Lloyd Thompson and Rentokil Initial. This helped the group grow organic revenue by 2.9% for the period. Overall revenue, including the impact of acquisitions, expanded 6.1% year-on-year and underlying earnings per share rose 7% to 16.7p.
Deals, deals, deals
Equiniti’s largest acquisition last year was the Wells Fargo Shareowner Services business. Completed at the beginning of February, City analysts expect this acquisition to help the company grow earnings per share by 11% in the first year of its operation. The enlarged group’s top line (which in this case is a better indicator of growth as the deal was funded with a rights issue) is expected to grow by more than 20%.
Based on these growth estimates, shares in Equiniti are currently trading at a 2018 P/E of 17, which is hardly cheap. But when you consider the group’s dominance of the share registration business, the multiple is easy to justify. It’s highly unlikely that the company will be displaced by a new upstart anytime soon, so Equiniti should be able to continue to use its established businesses to fund growth through bolt-on acquisitions.
As well as a market-leading position and double-digit earnings growth, the shares also support dividend yield of 2%. That might not seem like much at first, but the payout is expected to grow by around 25% over the next two years.