Co-Op Row Makes Me More Bullish On Royal Bank Of Scotland Group plc

Sometimes, you need to see something a lot worse than what you’ve got in order to realise that what you’ve got is actually pretty good.

Although that’s a bit of an obvious statement, it sums up neatly how I feel about Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) at the moment.

Indeed, the difficulties seen at Co-Op are making me appreciative of my shareholding in RBS, with the row continuing seemingly unabated as to what caused the £1.5bn black hole.

Although the former Chief Executive, Neville Richardson, strongly defended the quality of the loan book the Co-Op acquired when it purchased the Britannia building society, the financial regulator seems to disagree with his view.

Instead, they claim that the quality of the Britannia assets were the main cause of the vast black hole which the Co-Op now faces.

Of course, the argument may yet continue. In the meantime, I’m left to feel content with the strategy being followed by RBS as it seeks to complete its journey from a ‘bad’ bank all the way through to being a ‘normal’ bank.

Indeed, the management team at RBS, led by Stephen Hester, has pursued a relatively simple strategy of disposing of non-core assets, using the capital raised to reduce balance sheet risk and grow the remaining core assets.

Such a strategy inevitably takes time to come good but, over five years on from its £12 billion rights issue, RBS seems to be turning a corner.

Of course, it still has some way to go but market forecasts seem to be very encouraging. Earnings per share are expected to grow by an astounding 184% this year and 72% next year and, even though they are not starting from a particularly high level, this rate of growth is still very impressive.

Such forecasts put RBS shares on a forward price-to-earnings (P/E) ratio of less than 12, which compares very favourably to the FTSE 100 and to the wider banking sector. They trade on P/Es of 15.1 and 16.8 respectively.

So, RBS remains a stock with which I am very comfortable owing to its sound, focused strategy and its highly attractive growth rate. Furthermore, it seems to have moved on from the grave problems that Co-Op currently finds itself facing.

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> Peter owns shares in RBS.