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I think this challenger bank can smash the RBS share price

Our mainstream banks are still very much tainted by the financial crisis that led to massive taxpayer bailouts. And surely few bear the taint so fairly as the one that Fred ‘the Shred’ Goodwin oversaw as it destroyed billions in shareholders’ value while boosting the boss’s own personal wealth by what many consider to be an obscene amount.

But as investors, we need to put that behind us and decide whether Royal Bank of Scotland (LSE: RBS) shares are a good buy today. With some caution, I think they are.

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I’ve been sceptical of RBS lagging behind the Lloyds Banking Group recovery by some way, as it still hasn’t managed to pay a penny in dividends since they were cut off by the crisis. Lloyds paid its first post-panic dividend back in 2014, albeit a token amount, but we saw a yield of 3% a year later. Forecasts currently suggest 5.5% for this year and 6% next.

Turnaround?

But though I’ve been bearish on RBS in the recent past, I can’t help reflecting on fellow Fool Roland Head’s question: How low can the RBS share price go?

Q3 results beat expectations, and forecasts value the shares at just nine times full-year earnings per share. The dividend resumption, while taking longer to deliver than many of us had hoped, is set to yield an unexciting 2.6% this year, but that would more than double to 5.4%, based on 2019 forecasts.

Covered by earnings that would be more than two times too, and I see that as an increasing sign RBS is regaining respect in the investment world. I finally see it as a decent long-term buy.

Challenger

Meanwhile, the so-called challenger banks, which have none of the financial crisis baggage shouldered by their more establish peers, also languish at what look like weak valuations.

Look at OneSavings Bank (LSE: OSB), for example. On Thursday, it told us that its “strong financial and operational performance has continued in the third quarter.” It saw growth in its loan book over the past nine months of 16%, and “net loans and advances growing by £1,175m to £8.5bn.”

One thing that does disturb me a little is CEO Andy Golding’s stress on the bank’s buy-to-let business (which I think is a troubled market that’s set for more short-term pressure). But overall, I don’t actually see that as a sector that’s heading anywhere too disastrous in the foreseeable future.

Cheap shares?

As a long-standing buy-to-let investor myself, I wouldn’t get into that business today. I see long-term share investing as potentially more profitable these days, and a lot less risky.

But that doesn’t change the fact that OneSavings Bank shares are valued at what I see as an attractive forward multiple of only seven times projected earnings. It also comes with a progressive dividend policy that has seen expectations rise to yields exceeding 4% by 2019 and covered more than 3.5 times by earnings.

The market still seems to be firmly set against banking stocks. I say the market is wrong.

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