For most shares in the FTSE100, 2013 was a good year and investors have likely enjoyed capital gains and rising dividend income.
That makes me nervous about investing for 2014 and beyond, and I’m going to work hard to adhere to the first tenet of money management: preserve capital.
To help me avoid losses whilst pursuing gains, I’m examining companies from three important angles:
- Prospects;
- Risks;
- Valuation.
Today, I’m looking at banking company Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US).
Track record
With the shares at 347p, Royal Bank of Scotland’s market cap. is £21,495 million.
This table summarises the firm’s recent financial record (per-share figures adjusted for 2012’s share consolidation.):
| Year to December | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue (£m) | 25,868 | 33,026 | 31,798 | 24,651 | 17,941 |
| Net cash from operations (£m) | (75,338) | (992) | 19,291 | 3,325 | (45,113) |
| Adjusted earnings per share | (1462p) | (63p) | (5p) | (21.3p) | (53.7p) |
| Dividend per share | 193p | 0 | 0 | 0 | 0 |
1) Prospects
Before the credit crunch, Royal Bank of Scotland was the largest bank in the world ranked by its total assets. That’s why, according to today’s CEO, the bad news just keeps on coming. There was barely a financial pie in the world without a Royal-Bank-of-Scotland finger stuck in it. So, if there’s been trouble in some obscure area since, you can bet your last Scottish pound that RBS will be involved and there’ll be a provision down the road against the firm’s profit and loss account.
The recent trading update served up some hefty charges related to banana skins such as mortgage-backed securities, securities related to litigation, regulatory decisions, payment protection insurance, and interest rate hedging products. When quizzed on the telly, the CEO couldn’t rule out more following. The race has been on to shrink the banks activities for some time, but unwinding such a highly geared asset base of questionable quality can only be a painful, drawn-out process.
There’s no doubt that the firm has made good progress, and from an investor’s point-of-view RBS’s recovery might already have happened. However, it’s probably best to expect more news like this week’s for 2014 and beyond, with a leaner, smaller, less financially geared and greater-focused bank emerging … eventually.
We’ll find out more with the full-year results due on 27 February.
2) Risks
RBS is currently trading below its net asset value, but I reckon it needs to prove itself with consistent earnings and positive cash flow before the share price is likely to lift. Even then, we should consider the firm’s cyclicality. Share prices look forward. Right now, the share price will be anticipating better times ahead. When we get to consistent profit, the share price will be looking for peak earnings ahead and the top of the current macro cycle. One possible outcome of that process is that P/E compression could keep Royal Bank of Scotland’s share price static for years to come.
Meanwhile, what still lurks in the asset pile?
3) Valuation
The shares are trading at around 22% below the last-reported net asset value.
What now?
I don’t see an imbalance towards reward over risk with RBS right now. So why expose to that risk? To me, Royal Bank of Scotland looks unattractive.
