The Motley Fool

Is the RBS share price at bargain levels?

We have been a recurring story from the major lenders this month – bad loan provisions have hit profit numbers. The Royal Bank of Scotland (LSE: RBS) was no exception, putting aside £802m at the start of May to deal with potential defaults. Unlike its rivals however, RBS may have some things going for it. But are they enough to make the shares attractive at 119p each, which is less than the half what they cost in the New Year?

Few credit cards

Unlike some of its peers, notably Barclays, RBS has a comparatively small credit card business. Though the major concern for most banks at the moment is the business loan market, credit card defaults could soon follow.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Of course, lockdown and the coronavirus seem almost certain to cause some businesses to fail. We don’t yet know if this will translate into an actual prolonged recession, but the economic landscape certainly looks risky. If businesses go bankrupt, then they would more than likely default on the loans they have taken out from banks like RBS.

This could be bad, put perhaps the greater unknown factor is that of individuals. The economic safeguards put in place by the government may be enough to stave off the worst-case scenario for most people, but credit card-dependent businesses could still take a hit.

The furlough scheme for example, pays out a maximum of £2,500 a month. If you were previously earning £3,500, you may not starve, but you might not be using your credit card either. Lack of exposure to the credit card business could be a saving grace for RBS in this case.

Government-owned

The other difference for RBS is that it is still majority owned by the UK government after its bailout during the financial crisis. For me, this feels like a blessing and a curse.

My colleague Jonathan Smith argues that the government is unlikely to let a business it has a stake in go bust. To a certain extent this may be true, however letting it go bust is not the only option. Selling it off cheaply, breaking it up and delisting it entirely are all alternate scenarios (although very unlikely at this stage).

In fact, we already know the government intends to sell off more of its stake. But it will do so after the coronavirus crisis ends, which means more shares will be coming to market. More shares mean a lower share price, regardless of the company’s strength.

What’s more, it makes government interference, as well as press pressure, more likely. This is something I usually avoid in my investments. A “taxpayer-owned” bank has a lot of PR and political issues to navigate when making unpopular decisions, even if they are in the best interest of shareholders.

RBS shares certainly seem cheap, and I think there is an argument to say it is in a ‘not as bad as the others’ position. However, I think the future offloading of the government’s stake will be putting too much downward pressure on the stock for me to buy it any time soon.

There’s a ‘double agent’ hiding in the FTSE… we recommend you buy it!

Don’t miss our special stock presentation.

It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.

They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.

That’s why they’re referring to it as the FTSE’s ‘double agent’.

Because they believe it’s working both with the market… And against it.

To find out why we think you should add it to your portfolio today…

Click here to get access to our presentation, and learn how to get the name of this 'double agent'!

Karl 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.