The Contrary Investment Case: 3 Reasons To Buy Royal Bank of Scotland Group plc


In recent days I have looked at why I believe Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US) looks set to hurtle lower (the original article can be viewed here).

But, of course, the world of investing is never black-and-white business — it take a confluence of views to make a market, and the actual stock price is the only indisputable factor therein. With this in mind I have laid out the key factors that could, in fact, make Royal Bank of Scotland a deliciously shrewd investment.

Cost-cutting set to continue

Royal Bank of Scotland shocked the market this week when it announced a pre-tax loss of £8.2bn for 2013, worsening from the £5.3bn loss recorded in the prior 12-month period. Indeed, news that revenues continue to slide heavily across the business makes for worrying reading, with group income 12% lower at £19.4bn.

These terrible numbers quite rightly dominated the newswires, but the financial update also showed the hard work that the business is undertaking to transform itself from a sprawling, global bank to a UK-centric institution. Total operating expenses slipped 4% last year to £13.3bn, and Royal Bank of Scotland aims to get costs down to around £8bn in the medium term.

New chief poised to increase asset sales

Indeed, chief executive Ross McEwan’s no-nonsense approach in creating a more efficient and simplified bank should bolster confidence in the firm’s ability to shed its non-core divisions, improve the balance sheet, and push the existing capital ratio higher — one of the worst in the UK banking sector, at just 8.6% — sooner rather than later.

McEwan has impressed his intention to follow up the sale of £29bn of non-core assets last year, noting that “shareholders end up paying for parts of the business that cost too much and deliver too little” and that “this needs to change.” Royal Bank of Scotland also sold off its remaining 28% stake in Direct Line Insurance Group this week, and I have confidence that McEwan’s stern words will herald further aggressive streamlining.

UK Retail division on the mend

It was hard to pick positive notes from this week’s poor results release, with profits dipping across all the bank’s divisions last year. However, one bright spark was that although operating profits from UK Retail came in at £2.3bn — down more than 6% — this was a marked improvement from the 13%+ slide punched in the previous 12-month period.

With signs that the British economic recovery is clicking through the gears, performance from the bank’s single-largest division could be set for further marked improvement from this year onwards.

Bank on stunning gains with the Fool

Still, I believe that the risks still greatly outweigh the potential rewards at Royal Bank of Scotland, as detailed in my previous article. But whether or not you agree with my bearish assessment, I would strongly urge you to check out this BRAND NEW and EXCLUSIVE report which gives a detailed lowdown on the investment case for Britain's major listed banks.

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