As a longstanding shareholder in Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US), the rumours surrounding interest rate rises have given me cause for concern in recent months.
Certainly, the Bank of England has done its best to allay fears that rates could rise in the next year or so by providing forward guidance. However, the success of this policy is questionable, with many investors now being of the view that interest rates will rise a full two years before the Bank of England says they will.
Such news is not entirely positive for banks such as RBS, as higher interest rates should, in theory, mean the housing market is less buoyant. Mortgages will become more expensive, leading to relative underperformance of the UK property market as demand falls away.
As a major lender, this would clearly not appear to be positive news for RBS. However, I’m bullish on the prospects for the bank for three key reasons.
Firstly, RBS is ‘behind the curve’ in terms of its progress from the deepest, darkest depths of the credit crunch. Sector peer Lloyds is further along, having a much better cost:income ratio, a better quality asset base and, arguably, is reaping the benefits of progressing with its strategy of disposing of non-core assets at a much faster pace than RBS.
Therefore, although RBS is not quite where Lloyds is, it has that development to come and that, in my view, will lead to improved market sentiment.
Secondly, the strategy employed by RBS is very sound. It is still shrinking its balance sheet and is, I feel, genuinely becoming a ‘normal’ bank having been a ‘bad’ bank for so many years. Although Stephen Hester, CEO, may never see the fruits of his labours, I believe he has acted in the best interests of shareholders and put RBS on a very sound financial footing.
Thirdly, shares in RBS remain dirt cheap with excellent growth prospects. Indeed, the forward price-to-earnings ratio is just 12.1 — well below the FTSE 100 on 15 and the wider banking sector on 17.
So, a sound strategy, the potential for improved sentiment as the business continues it comeback, as well as an attractive valuation, make me more bullish on prospects for RBS.