Is Royal Bank of Scotland Group plc Set For Electrifying Earnings Growth In 2014?

Today I am analysing banking giant Royal Bank of Scotland Group’s (LSE: RBS) (NYSE: RBS.US) earnings prospects for 2014.

Earnings outlook remains a concern

Without doubt, signs that the British economy is once again on an uptrend is great news for the Royal Bank of Scotland. Still, the bank does not believe this is likely to have a material impact as we look at 2014.

Indeed, the firm expects a continued muted performance from our core businesses in the short term, due primarily to the continued effects of low interest rates, excess liquidity, a smaller balance sheet, and lower securities gains from our liquidity portfolio.”

Meanwhile, although Royal Bank of Scotland’s restructuring programme is ready to heavy further cost efficiencies looking into 2014, the institution has warned that these measures will take a few years to embed.

A bigger concern to the bank looking into next year is the threat of impending legal action from many quarters. This month the business agreed to pay a €391m settlement fee for Yen LIBOR and EUROBOR manipulation, as well as a $100m fine related to breaking sanctions with Iran and other blacklisted countries. With fresh action related to the mis-selling of PPI, interest rate hedging products, and more recently claims of fraud related to a rights issue back in 2008 on the horizon, the financial penalties could be on course to stack up.

Royal Bank of Scotland has consistently swung back and forth from printing annual earnings and losses, the consequences of the 2008/2009 financial crisis continuing to hound the group. Indeed, analysts expect the firm to lurch from earnings of 6.3p per share last year to losses of 14.2p per share in 2013.

But the bank is expected to rebound solidly in 2014, with earnings of 25.6p per share pencilled in by the City’s number crunchers. But this still leaves the company dealing on a P/E rating of 12.9 for next year, an unappealing reading when measured up against its peers — Barclays and Lloyds Banking Group, for example, currently sport forward averages of 8.9 and 11.5 respectively.

With no clear sign that Royal Bank of Scotland is ready to deliver sustained earnings growth, in my opinion the bank remains an unattractive stock pick at present. The decision to create a ‘bad bank’ and speed up its asset sales programme will make it even harder for the bank to deliver long-term shareholder value, and I fail to see any meaningful earnings catalysts looking ahead.

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Deliberations are continuing between the government and Royal Bank of Scotland over when shareholders can look forward to a resumption of the 80%-taxpayer-owned bank's dividend policy. Forecasters expect this to transpire next year, with a predicted full-year payout of 0.67p per share currently presenting a yield of 0.2%.

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