How Much Lower Can Royal Bank of Scotland Group plc Go?

Right now I’m looking at some of the most popular companies in the FTSE 100 and wider market to try and establish which direction their shares are likely to move.

Today I’m looking at Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) to ascertain if its share price will continue to fall.

Market sentiment

Unsurprisingly, the market is not best pleased with RBS at present, as the bank continues to report rising losses and fails to show any signs of a recovery.

Indeed, it has now been more than five years since the financial crisis and RBS’s £46bn bailout but RBS’s new CEO, Ross McEwan, wants more time and has has stated that the bank will require at least five more years of restructuring. 

However, over this period RBS’s revenue is not expected to expand due to the fact that the bank is being forced to close and discontinue overseas operations as part of its bailout agreement. As a result, RBS is planning to slash costs by around £5bn over the next few years and cut 25% of its global workforce in an attempt to grow profits. 

RBS’s troubles go deeper than a lack of profitability. The bank is running seriously low on capital and following a profit warning earlier this year, the City now expects that RBS’s Core Tier One capital ratio will fall within the region of 8.1% to 8.5% for 2014. This is far below RBS’s self-imposed capital target of 11% by 2015. 

City expectations

Despite the dismal outlook from RBS’s management, the City appears relatively upbeat about the bank’s future.

For example, current City forecasts estimate that the bank will report a pre-tax profit of just under £4bn for 2014, followed by a pre-tax profit of £4.5bn for 2015.

It remains to be seen if RBS can actually meet these forecasts. Indeed, with so many headwinds facing the bank, as well as management’s warning that it could take another five years for RBS to turn things around, it seems as if these forecasts are optimistic to say the least. 

What’s more, current City forecasts are calling for the bank to offer a dividend payout of 1.5p per share for 2015. However, with the bank still far away from meeting its targeted capital ratio, it’s unlikely that regulators will allow RBS to pay out a dividend to investors. 

Possible headwinds

There are multiple headwinds that could impact RBS going forward, although at present the most worrying issue is the bank’s attempt to dispose of its US arm, Citizens Financial Group.

Under the terms of RBS’s bailout, the bank was given until the end of 2016 to sell Citizens, allowing the company to shed $100bn of risky assets and boost its capital ratio to 9.4%. However, there is little sign of interest from potential bidders for Citizens, so RBS has been forced file for an initial public offering.

The problem is that Citizens made a $3.4bn net loss last year and regulatory hurdles are putting pressure on the group. If RBS cannot make a clean exit and Citizens’ IPO struggles, then the bank will face the fury of regulators. 

Foolish summary

So overall, with so many headwinds facing RBS, I feel that the bank’s shares will continue to fall. 

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In the meantime, please stay tuned for my next verdict.

Rupert does not own any share mentioned within this article.