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Royal Bank Of Scotland Group plc: The Best Turnaround Story In The UK!

RBSRoyal Bank Of Scotland (LSE: RBS) (NYSE: RBS.US) is not the best bank in the UK, but it certainly is the most appealing restructuring story in the UK banking sector.

Q3 Results: Surprise, Surprise

As I have been saying for some time, the shares of RBS offer more upside than those of domestic rivals.

“Guidance for losses at RCR has materially improved this year to up to £3bn from up to £4.5bn. If guidance improves further, the shares will rally,” I wrote on 12 September.

RBS stock was up more than 4% in early trade on Tuesday as the state-backed bank announced that its bad bank, RBS Capital Resolution (RCR), would release about half a billion pounds in provisions. On top of that, it said that its Irish unit would also free up about £300m.

RBS is a texbook example of how the banks should manage expectations in this market.

At the end of July, its stock surged more than 10% as management surprised the market with an ad-hoc trading statement. Today, the bank is giving investors another reason to be confident about its prospects. This is not to say that RBS is out of the woods, but if its current strategy continues and investments speed up, the bank should be able to deliver value to shareholders next year and in 2016.

Of course, risks remains.

“RCR’s future overall costs and speed of wind-down remain subject to significant potential volatility,” RBS said on Tuesday. “The potential exists, if market conditions remain favourable, for RCR to incur limited future impairments and disposal losses, and an accelerated timetable to achieve its wind-down goals,” the bank added.

Investment/Divestment

“Corporate & Institutional Banking” revenues have come in below expectations, RBS also pointed out, but that’s one very risky part of any banking business that has become less important at RBS — which is a good thing.

The bank must stay competitive in other segments, such as retail banking, however.

Fact: RBS will invest more than £1bn in its mobile banking services in the next three years. As branch transactions fall, the bank will upgrade the IT infrastructure operations of more than one fifth of its branches in the UK. It should be quick to upgrade more than 50% of its branches, in my view.

Furthermore, RBS said on Monday that it was planning to invest top dollar in order to improve “the banking experience for its commercial and corporate customers,” as it aims to “speed up account opening and simplify lending processes.” That’s PR stuff, true. As matter of fact, though, the amount of investment is estimated at more than £1bn between 2014 and 20018.

Finally, the IPO of Citizen Bank hasn’t gone according to plans as it was priced below the low-end of the initial guidance, but RBS got away with it. Now, I’m wondering whether RBS is a buy?

I am not sure that its stock offers much upside at this price, as its fair value is about 5% to 15% below its current level, according to my estimates. Still, I am convinced that RBS may turn out to be the best turnaround story in the UK banking industry. 

Not interested in RBS, yet interested in other banks in the UK? Want to know more about their valuations and prospects? 

Our analysts have published this ad-hoc report , which makes for a truly compelling reading. Based on several metrics, there is reason to believe that value may be up for grabs in the UK banking sector into 2015.

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Alessandro Pasetti 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.