Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) stands to significantly benefit, in my view, from the government’s Help To Buy scheme.
Indeed, despite the Liberal Democrats being critical of the scheme at their recent party conference, with their leader Nick Clegg voicing his concern that it could create a housing bubble, I think the scheme is a major plus for RBS.
For starters, the scheme has the potential to increase house prices, leading to increased prosperity and spending in the economy as well as fewer defaults on loans as less homeowners find themselves in negative equity.
However, Help to Buy also has the potential to increase the number of housing transactions, as buyers will only need a deposit of 5% to gain access to rates that are normally aimed at those with a 25% deposit, with the government loaning the remaining 20%. More transactions equate to more mortgages and, ultimately, more fees for RBS.
However, the Help To Buy scheme is not the only reason I’m thinking of adding to my current holding in RBS. There are three other reasons why it’s on my ‘buy’ list.
Firstly, RBS is employing a strategy which, in my view, is very logical and very sound. It has gradually disposed of riskier assets that utilised large amounts of capital for relatively low returns, shrinking its asset base substantially to leave a leaner and meaner bank.
Indeed, although it may not yet be able to call itself a ‘strong’ bank, it is certainly no ‘bad’ bank, with its balance sheet being in much better shape than it was a few years ago.
Secondly, RBS offers good value for money when earnings forecasts are taken into account. Earnings per share are expected to be 30p in 2014, putting shares on a forward price to earnings (P/E) ratio of 12.
This compares favourably to the FTSE 100 and also to the wider banking sector. They trade on P/E multiples of 14.8 and 16.3 respectively.
Thirdly, growth prospects for RBS are extremely impressive. Indeed, although earnings are starting from a low base, growth rates of 185% this year and 70% next year are acctractive nonetheless, meaning RBS has a very, very low price to earnings growth (PEG) ratio.
So, I’m impressed with the strategy employed by RBS, its value and the growth prospects that the bank offers over the next couple of years. In addition, the Help To Buy scheme should provide a fillip to the bank through higher levels of housing activity.
> Peter owns shares in Royal Bank of Scotland.