Is there finally light at the end of the tunnel for Royal Bank of Scotland Group plc?

Royal Bank of Scotland (LSE: RBS) is the one FTSE 100 company everyone loves to hate, and it’s easy to understand why. The bank had to be bailed out by the taxpayer during the financial crisis after years of poor management and misguided acquisitions. And since the crisis, it has lurched from one problem to another with no end in sight to its troubles.

Still struggling

Nearly 10 years on from one of the largest financial crises the world has ever seen and RBS is still struggling to clean up its balance sheet. And as well as the toxic assets it is trying to shift, management is also having to fight off a lawsuit from shareholders who claim they were wrongly mis-sold the bank’s 2008 rights issue and regulators who continue to demand billions of dollars of fines from it. 

Even in a perfect business environment achieving a favourable resolution to these matters for all involved would be difficult. It doesn’t help that RBS is trying to turn itself around in one of the most hostile environments for banks ever seen.

Still, amid the carnage of the RBS balance sheet and legacy issues, there are some gems to be found. It is these gems that will ultimately save the firm and its reputation from collapse, and as long as they continue to achieve returns from RBS, its future is not as bleak as many make it out to be.

A changed beast

Over the past decade, RBS has changed significantly from a global investment bank to a simpler business focused on personal and business banking. Barring the skeletons in the closet, its investment bank is no longer a problem area for the firm.

Its most profitable business is now its Personal & Business Banking, Commercial & Private Banking and NatWest Markets franchises, which produced a 4% increase in adjusted operating profits to £4.3bn for 2016. For these businesses, adjusted return on equity was 11.1% and fourth quarter adjusted operating profit came in at £848m, up 61% from the year-ago period. Overall, the total loss for 2016 came in at just under £7bn. Of this total, a £2.1bn charge was related to restructuring, and there was a further cost of £5.9bn related to litigation and conduct costs. 

Restructuring charges will come to an end at some point. The bank is committed to achieving its sub 50% cost-to-income ratio and 12% return on tangible equity targets by 2020, so we can assume this is a possible end point for restructuring. At the same time, it can be argued RBS’s legacy litigation costs have reached their peak as it awaits its fine for mis-selling toxic mortgage securities from the US authorities, which could be the largest fine paid by the business to date.

Still, when this penalty is paid, and the restructuring charges start to fall away, RBS’s true colours should start to show through. Investors who want to profit from this will have to be patient, but it’s clear there’s a good business hiding under all of RBS’s troubles.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.