Why Brokers Can’t Agree On The Prospects For Royal Bank Of Scotland Group Plc

The good, bad and ugly bank

I’ve just checked out the last five broker forecasts for Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) and they’re an unusually contradictory bunch: Add (Numis); Underperform (Bank of America); Hold (Investec); Sell (Deutsche Bank); Underperform (Credit Suisse). Together they make sense, however, because RBS is a contradictory stock. I hold it, but all too often, wish I didn’t. Sometimes I’m tempted to top up my holding, at other times, I want to sell up and move on.

RBS provokes mixed responses, mostly extreme. Most people can’t forgive former chief Sir Fred Goodwin’s hubristic arrogance and the endless string of banking scandals RBS has been involved in since. Yet when I landed at Edinburgh airport last year, I was greeted with huge billboards at arrivals heralding its status as a Scottish icon. Lest we forget, this is still a major UK retail bank, good, bad and ugly.

RBS for excess

So why do I hold it? Because slowly, imperceptibly, a good bank is emerging out of the wreckage of the bad. RBS has been steadily dumping its high-risk and peripheral activities activities. Former chief executive Stephen Hester shrunk the value of its unwanted businesses and assets from £258 billion to just £35 billion. Admittedly, there is still a lot of rubbish to get rid of. Q3 results showed a £634 million pre-tax loss. Further impairments are expected in Q4, as RBS ditches more high-risk assets. The fines and penalties keep coming, almost on a weekly basis. On Monday, a federal judge in Connecticut fined RBS $50 million, a small chunk of the $600 million-plus in penalties it has paid for manipulating interest rates. Nobody knows what scandal is likely to emerge next. At the same time, RBS is still chucking out hundreds of millions of pounds in bonuses. It isn’t a pretty picture.

Adding to the confusion, RBS is still 81% owned by the taxpayer. While Chancellor George Osborne is preparing to offload the last chunks of Lloyds Banking Group, any RBS sell-off almost certainly won’t happen this side of the May 2015 general election. Today’s share price of 358p is still well below the 502p taxpayers shelled out at the height of the financial crisis. Yet I bought a stake in this lousy rotten bank when it traded at 210p, so I am 70% up on that trade. You might call it winning ugly. 

Long-term trade

I’m holding onto the stock because I think the underlying investment case for RBS is inarguable. It is a major high-street bank and should benefit from the rapid recovery in the economy. I can see why brokers are confused, but I’m quite clear-headed. We already know RBS is too big to fail. Now I think it is too big not to succeed. I’m planning to hold RBS for five, 10 or 20 years, long after the dividend has been restored, long after it has been sold back into private ownership, long after Sir Fred has faded from public consciousness. In the short term, this is a speculative bag of confusion. In the long term, it looks like a buy.

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> Harvey owns shares in RBS.