Time to buy Royal Bank of Scotland Group plc shares as it closes 1 in 4 branches?

Why Royal Bank of Scotland Group plc (LON: RBS) could be worth considering right now.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In today’s digital world it seems inevitable that old, established businesses will end up closing down at least some of their bricks-and-mortar footprint as trade migrates online.

That’s certainly what the big banks are doing. Royal Bank of Scotland Group (LSE: RBS) is the third this week to announce branch closures and cuts in staffing levels, after Lloyds and Yorkshire Building Society. The knife cuts deep. One in four branches up and down the country will go, 259 in all with the loss of 680 jobs. Difficult times for some individuals, but good for the business as the costs of maintaining assets-turned-liabilities are removed.

Adapting for the future

RBS points out that it is investing in its contract with the Post Office, in digital services, and in mobile branches to serve rural communities. But more and more customers are banking online, so 62 RBS and 197 NatWest branches will disappear. In two compelling statistics, UK branch network footfall is down 40% since 2014 and mobile transactions are up a whopping 73%. I reckon this is a strong tide the bank can’t fight.

Let’s not forget that RBS is still in intensive care following the financial crisis 10 years ago. The British taxpayer, via the government, still owns around 71% of the shares, so it’s important that the bank adapts to survive and thrive going forward. Long-suffering private shareholders need the business to perform well too.

Perhaps the ducks are lining up for an investment in RBS at last. After several years of paying zero dividends, 2018 looks set to be the year that the bank finally returns to delivering a meaningful payment. Today’s share price of 273p puts the forward dividend yield at a little over 3.2% for 2018, enough to raise interest in the stock as an income investment, in my view.

Not so stressed

But is the dividend sustainable? City analysts following the firm are basing their dividend projections on resurgent earnings this year propelling the firm from annual pre-tax losses back into profits. Finally, RBS has broken its long lossmaking run, and the assumption is that earnings will lift a further 6% during 2018. The bank’s decisive action on branch closures will almost certainly help the firm’s profitability going forward.

We learnt on 28 November that the business did quite well in the Bank of England’s 2017 stress test, even though there remains distance to travel before its capital base will be considered strong enough for the future. The Common Equity Tier 1 figure came in at 7%, just missing the Systemic Reference Point of 7.4%, and the Tier 1 leverage ratio hit 4%, beating the 3.25% hurdle rate.

Glimmers of sunlight

Chief financial officer Ewen Stevenson reckons RBS is making progress towards being the stress-resilient bank we aspire to be.” But he warned: “Until we have resolved our remaining major legacy conduct issues and non-core portfolio interests, we will continue to show stress test results weaker than our long-term targets.” RBS isn’t out of the woods yet, but maybe it’s beginning to see glimmers of sunlight through the canopy that could presage a meaningful recovery from here.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the 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.

 

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »