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The RBS share price has crashed to a 3-year low. Here’s what I’d do now

The RBS (LSE: RBS) share price has tanked over the past few weeks. The stock is off around 11% over the past month. It’s fallen 17% over the past three months and, over the past year, it’s lost a quarter of its value. All these figures exclude dividends.

Following this performance, its shares are now dealing at their lowest level since mid-2016. In some respects, this is extremely surprising. Back in 2016, when the lender reported a loss of £5.2bn, RBS was still in the process of recovering from the mistakes made before the financial crisis.

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Rising profits 

However, during the past three years, the bank seems to have gone from strength to strength. For 2019, it reported a total net profit of £3.5bn. Management also reinstated the group dividend in 2018, the first RBS had paid out since the crisis. 

In its current financial year, analysts are forecasting a total distribution of 11.8p per share. That translates into a dividend yield of 6.4% on the current share price. Also, analysts expect the group to report a net profit of £2.7bn this year. On an earnings per share basis, the forecast is 22.6p. This suggests the stock is trading at a price-to-earnings (P/E) multiple of 8.1. 

Further, after recent declines, the price-to-book (P/B) value of the bank has dipped to 0.5. That suggests if the business were broken up and sold piece by piece, it would be worth 100% more than its current market value. 

What’s next? 

All of the above points to a highly profitable bank that’s returning cash to investors. Its valuation metrics also indicate the shares offer a wide margin of safety at current levels. 

As such, now might be an excellent time for investors to pick up a share of RBS. While it’s impossible to tell what the future holds in the near term for the bank’s share price, over the long run, the stock should track RBS’s fundamental performance. 

Therefore, if the bank continues to report earnings growth and healthy dividend distributions to investors, the share price should head higher over the long term.

Indeed, it’s clear the business is in a much stronger position than it was in 2016. What’s more, the threat of bankruptcy, which has weighed on the stock price for much of the past decade, no longer exists.

Balance sheet strength

RBS’s balance sheet is now strong enough to withstand even the most severe economic downturn, after 10 years of remedial action. In the Bank of England’s latest annual assessment of bank balance sheets, RBS passed a crisis scenario involving a 4.7% fall in UK GDP, a rise in unemployment to 9.2%, and a 33% drop in house prices.

That’s a stark change. Four years ago, RBS failed the BoEs annual test and was told to improve its financial position by £2bn.  

Overall, as the RBS share price continues to plunge, it might be best to focus on the bank’s long-term potential, and value on offer at current levels, rather than the falling price.

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Rupert Hargreaves 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.