Is Now The Right Time To Buy Royal Bank Of Scotland Group plc?

RBSRoyal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US) is coming under selling pressure, as fears grow that Scotland will vote ‘yes’ to independence on 18 September.

Although we can’t know what the outcome of the referendum might be — or how it might affect RBS — we do know that the bank’s current share price is almost unchanged from one year ago.

Since then, RBS has made considerable progress with its turnaround plan, and is expected to report a full-year profit of around £3bn for 2014. This suggests to me that RBS shares could be attractive at today’s price, so I’ve been taking a closer look, to see if the bank’s fundamentals support this argument.


Let’s start with the basics: how is RBS valued against the market’s expectations of future performance?

P/E ratio

Current value

2-year average forecast P/E


Source: Consensus forecasts

RBS is expected to report earnings per share of around 30p for 2014 and 2015. On this basis, RBS trades on a forecast P/E of 11.3, which doesn’t look too demanding.

What about the fundamentals?

A lot has changed at RBS over the last five years. In the table below, I’ve calculated the five-year rate of change for three of the bank’s key metrics:

5-year compound average growth rate


Net income


Net interest margin


Loan:deposit ratio


Source: Company reports

Although the RBS’s net income has fallen by 9.3% per year over the last five years, this is to be expected, as RBS has disposed of a number of non-core assets and operations, including Direct Line Insurance Group, during that time.

One positive is that RBS’s net interest margin, a key measure of profitability, has risen by nearly 3% per year, on average, since 2009.

A second positive is that the bank’s loan:deposit ratio has improved, falling by an average of 7% per year from its 2009 value of 135%, to 94% at the end of 2013. A loan:deposit ratio of more than a 100% indicates that a bank has loaned more money than it has taken in deposits, and is considered risky.

Below book value

A final point is that RBS continues to trade below its tangible book value per share — the theoretical break-up value of the bank, excluding any ‘goodwill’ attached to the bank’s brand.

This can indicate a value opportunity, but in the case of a bank, may also indicate that the market believes further asset write-downs will be needed: RBS’s net tangible asset value per share has fallen from 446p at the end of 2012, to its current value of 376p per share.

Buy, sell or hold RBS?

Overall, I rate RBS as a hold at the moment, as I think the risks are quite evenly balanced. Ultimately, however, it's your decision -- but before you consider buying or selling shares in any UK bank, I would urge you to take a look at "The Motley Fool's Guide To Investing In Banks".

This FREE, no-obligation report provides six important valuation ratios for each UK bank, along with exclusive analysis from the Fool's expert banking analysts.

To receive your free copy of this report today, simply click here now.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.