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Why the RBS share price could smash the FTSE 100 this year

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The recovery has been coming along strongly at bailed-out Lloyds Banking Group, but fellow struggler Royal Bank of Scotland (LSE: RBS) has lagged by comparison.

Lloyds paid its first post-crash dividend back in 2014 and forecast yields are already up to 5%, but shareholders haven’t yet had a penny handed out from RBS. That’s set to change this year, and signs that the RBS share price could end up putting in a great 2018 are steadily emerging.

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It might be bad news for some customers that RBS is closing branches, but at the bank’s AGM on Wednesday, chief executive Ross McEwan pointed out that branch transactions are down 36%, ATM transactions down 35%, and cheque usage has dropped 39%. RBS simply has to adapt to the shift to online banking, and this move should be good for future profits.

The departure of chief financial officer Ewen Stevenson is a bit of a shock, as he had been tipped in some quarters as the next CEO. I don’t actually read anything into that to cause me concern, but it could hold the market back until a successor is in place.

RBS returned to profit last year, and though there’s no EPS progress expected this year, the predicted 12% growth for 2019 would drop the P/E to 10. Dividends are coming back too, with a modest 2.6% on the cards for 2018, followed by a predicted 4.7% next year.

And one serious piece of progress comes from the bank’s $4.9bn settlement with the US Department of Justice related to the subprime mortgage crisis, which finally puts its legacy problems behind it. It’s less punitive than many had expected, and it could have one key extra benefit. It could lead the way to the government selling off the taxpayers’ stake — and that could finally be what the markets have been waiting for.

Overlooked bargain

While RBS and Lloyds have been catching the limelight, Standard Chartered (LSE: STAN) has perhaps been a little overlooked. 

First-quarter results didn’t excite the markets, with pre-tax profit of $1.2bn coming in slightly behind expectations. But one quarter is pretty meaningless to long-term investors, and I saw some positive signs.

Underlying return on equity reached 7.6% on an annualised basis, up from 6.3% at the same stage last year, and that bodes well for the bank’s target of better than 8%. 

Broad-based income growth came at the top of the target range, and a boosted CET1 ratio of 13.9% together with improved credit quality all suggest we’re looking at a sustainable recovery.

A few years ago, Standard Chartered’s major exposure to China and the wider Asian region was a cause of worry as Chinese economic growth looked set for a slowdown. But the country has rapidly grown to become the second largest single-country economy in the world, after the USA, and I see that as a long-term source of strength rather than weakness.

I also can’t help wondering if the markets have missed the current forecasts for Standard Chartered, which indicate EPS rises of 50% this year and 22% next. That gives PEG ratios of 0.3 and 0.5 for the two years, meaning we have a FTSE 100 company on a growth rating that’s usually associated with small-caps.

Forecast dividends are still modest at 2.4% and 3.3%, but a 2019 P/E multiple of 12 looks attractive to me.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group and Standard Chartered. 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.

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