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Why I’ve Bought Royal Bank of Scotland Group plc

RBSSo you’re a contrarian investor? Well, what is the most obvious contrarian investment since the Financial Crisis? Well, the banks, of course.

And which is the most contrarian of the banks? Well, Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US), of course. With a mountain of debt, and caught in the vortex of the Credit Crunch, this was the ultimate contrarian play.

And this showed in the share price, which fell to an astonishing 1/50th of its pre-Crisis high. So, when you think the share price has bottomed, you come along and buy in. Sure thing, huh? And so ensues…. well, a lot of pain.

With hindsight, it is not surprising that RBS would not recover quickly. Having suffered such horrendous losses, the only way this bank would ever recover was very slowly and very painstakingly.

Most investors had thrown in the towel

It’s seven years since the Financial Crisis struck, and this bank’s share price has still not broken out of its range. No matter how patient an investor you are, by this point you will have thrown in the towel. Many an investor would have given up, sold their shares, and concluded that the share price would never recover.

This is penultimate thinking: you see what has been happening recently, and assume that it will always be like this.

But wait a moment — let’s dig a little deeper. Look at the latest results. Pre-tax profits for the first six months of the year have doubled from £1.374bn to £2.652bn. Losses from impairments have tumbled from £1.881bn to £269m. The selling off of assets is progressing well. Even the heavily-loss making Ulster Bank is now turning a profit.

Signs of real progress

What’s more, a key measure of the bank’s financial strength, its core tier 1 capital ratio, has improved dramatically, increasing from 8.6% to 10.1%. And the cost:income ratio is also improving.

The fact is that, ever since the Crisis hit, RBS has been working hard to recover. After years of hard graft, the fruits of this work are only now showing through, and it looks like the company is finally turning around.

So is it all roses from now on? Of course not. There will still be volatility; there will, as Chief Executive Ross McEwan has said, still be bumps in the road. The bank’s rebuilding process is continuing.

But, for the first time, I see signs here of real progress. And I have been convinced enough to buy shares in this business. After all, you don’t buy into a company once it has fully recovered, but when the turnaround is just beginning. And this is why I’ve bought RBS.

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Prabhat Sakya owns shares in RBS. The Motley Fool has no position in any of the shares mentioned.