Why Royal Bank of Scotland Group plc Has Great Growth Prospects

rbsRoyal Bank of Scotland (LSE: RBS) (NYSE: RBS) shares have not had such a good year as those of fellow struggler Lloyds Banking Group, but that’s because the black horse bank has returned to profit a good bit sooner and is closer to paying decent dividends again.

In fact, compared to Lloyds’ share price gain of around 50% over the past 12 months, RBS has seen its price actually fall a few percent, to today’s 341p.

But what are its growth prospects looking like? Here’s what the current analysts’ consensus suggests:

Dec EPS Change P/E Dividend Change Yield Cover
2013 -10.7p n/a n/a 0p n/a 0% n/a
2014 24.9p n/a 13.9 0.4p n/a 0.1% 62x
2015 28.8p +16% 12.0 4.1p +925% 1.2% 7.0x

Lagging behind

Essentially, RBS is about a year behind Lloyds — a return to positive earnings is expected this year, and a resumption of some sort of reasonable dividend is not on the cards until 2015.

But after five years in a row of pre-tax losses and a loss of £666m expected for the year just ended in December 2013, this year should see the bank in the black again and will hopefully mark the start of a few years of healthy earnings growth.

Royal Bank of Scotland is scheduled to deliver full-year results on 27 February, and like Lloyds, the bank is going to be setting aside substantial sums to cover the ongoing costs of past misdeeds.

More redress costs

In its January trading update, we heard that £1.9bn is earmarked for various claims relating to mortgage-backed securities and associated litigation, a further £465m is down for payment protection insurance mis-selling, and £500m more is to go towards redress of sales of interest rate hedging products — RBS is also suffering from higher-than-expected claim success rates.

The bank had earlier reported a pre-tax loss of £634m for the third-quarter, after swallowing a £496m accounting charge. But its Core Tier 1 ratio had reached 9.1% on a fully loaded Basel III basis, which is looking a lot healthier, and is expected to reach 11% by the end of 2015.

Cautious optimism

We do still have RBS’s internal “bad bank” looming over any recovery, but it’s looking increasingly like 2013 could be the last of the really bad years. And I think we can be cautiously optimistic about the forecast earnings growth starting this year — with maybe even an above-average dividend by 2016.

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> Alan does not own any shares in Royal Bank of Scotland or Lloyds Banking Group.