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Is the RBS share price now the biggest bargain on the FTSE 100?

If you hold shares in CYBG (LSE: CYBG) you will be hurting today, as the Clydesdale & Yorkshire Bank owner is down 14% as it warned markets of a massive PPI hit. It makes Royal Bank of Scotland Group (LSE: RBS) look positively healthy by comparison. 

Cry PPI

CYBG’s PPI nightmare completely overshadowed news of a 13% rise in underlying profit before tax to £331m over the year to September, with the bank making a statutory loss after tax of £145m (down from a profit of £182m in 2017) due to far greater than anticipated legacy PPI costs. 

Total PPI provision during 2018 was £352m plus £44m for other legacy conduct. Management said that weekly complaint volumes have been falling since the end of July but it still increased provisions by a “prudent” £150m to cover complaints before the final time bar in August 2019. This reduced the group’s common equity tier 1 ratio by around 182bps to 10.5%.

Low interest

The £3bn banking group, which recently completed its acquisition of Virgin Money, also reported a 1% rise in net interest income, while customer deposits, loans and mortgages all grew more than 4%. Underlying costs fell 6% to £635m, ahead of guidance.

Its shares have taken a beating to hit their lowest level since April 2016. CYBG now trades at 9.8 times forecast earnings, which could be a buying opportunity for those willing to see through its PPI stresses. However, although it increased its ordinary dividend to 3.1p per share, it still offers a forecast yield of just 0.8%, but is expected to hit 4.1% next year. Today could be an opportunity to go bottom fishing. However, it’s been a turnaround prospect a little too long for my liking.

Down and out

The banking sector has been tough for the big boys as well. FTSE 100 giant RBS was the biggest villain in the banking crisis and has taken longest to restore its reputation (and bottom line), as it continues to struggle to this day.

The £25bn company trades 33% lower than it did five years ago, and it wasn’t considered to be doing very well then. RBS has also been hit hard by the PPI crisis, along with just about everything else, and will be gratefully awaiting next August’s deadline (and dreading the last-minute claims rush).

Income hero

Even the news that RBS is restoring its dividend in August has failed to trigger a turnaround. Yet it is on course to be a top income stock, with a forecast yield of 3.1%, covered 4.1 times, which analysts reckon could hit 5.8% next year. That is a huge jump from zero.

RBS is trading at a tempting valuation of just 7.7 times forecast earnings, but still investors are shying away. Many were unhappy to see it report a 6.4% drop in first half operating profits to £1.83bn, even though this was made to look worse by an £801m charge for litigation and misconduct issues, double the previous year’s £396m.

Chief executive Ross McEwan has made progress but revenue growth looks sluggish-to-non-existent and the UK economy is mired in uncertainty, which hardly helps. Yet I can’t help thinking there’s an opportunity here, for the very long-sighted.

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harveyj 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.