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Could this looming threat destroy RBS and every other FTSE 100 bank?

For the last 12 years, the banks have lurched from one crisis to another. None more so than Royal Bank of Scotland (LSE: RBS), which taxpayers were forced to bail out to the tune of £45bn. There could be more trouble ahead, so watch out.

It’s an absolute scandal

The sector has been rocked by a host of lesser scandals since the financial crisis, including PPI, Libor-fixing, money-laundering and much more. The recovery process has been slow and the losses have continued to mount. Last year, chairman Sir Howard Davies said RBS had lost £130bn over the decade after it was rescued.

These are huge, especially when set against its market-cap of £29bn. Loyal investors have also suffered, with the RBS share price a third lower than it was five years ago. At least it now pays a dividend, currently yielding 2.3%, with the promise of more to come. So would I invest in it now?

Many will be tempted by the 16% jump in its share price over the last month, as investors celebrated the final deadline on PPI claims and the appointment of new CEO Alison Rose. And a potential Brexit resolution.

That’s a massive yield

Short-term forecasts are good, with City analysts anticipating a 90% leap in earnings this year, which could lift the yield to 10.4%. That’s forecast to fall to 5.7% in 2020, but still more than respectable. The bank looks cheap too, trading at just 9.5 times forward earnings, with a price-to-book ratio of just 0.6 (where 1 = fair value).

Before you part with your money, a word of warning. Banks like RBS are on the frontline when the global economy slows. Their personal and business borrowers are more likely to default, while continued low interest rates squeeze net lending margins.

There is a longer-term worry. I’ve just read a report by Vincent Vinatier, manager of the AXA WF Framlington Fintech Fund, who’s warning that global banks must spend hundreds of billions on IT systems to compete in the digital world.

Deadly disruption

Globally, they must lavish a “mind-boggling” sum of nearly $300bn by 2021, and the costs will continue to rack up as they fight off the challenge from online and app-based start-ups.

Vinatier warns that too many established banks have clunky systems, and that upgrading them is complex and costs typically overrun. The big banks also have to fund “a move to the cloud and constant investment in cyber-security.”

He wasn’t specifically talking about RBS, but it will be hard for such a major player to compete against nimble new fintech operations, which customers can quickly download onto their phones to see how they’re getting along. For now, they’ve focused on services such as savings rates and currency transfers, but that’s steadily broadening.

Warren Buffett favours stocks with wide and sustainable “economic moats,” protecting them from competition, and the banks have long been protected by their scale, and customer inertia. As the digital disruptors put the retail banking model under siege, that moat is slowly evaporating. You have been warned.

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Harvey Jones 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.