Royal Bank of Scotland Group (LSE: RBS) (NYSE:Â RBS.US) has made the entire nation poorer in recent years.
But one day, it could make you rich.
1. Changing at every level.
RBS chief executive Ross McEwan said earlier this week that RBS needs to change its behaviour “at every level”. Nobody would disagree. This is a company that is accused of deliberately driving its SME customers out of business, to strip their assets (a charge it denies). RBS has just made another £3bn worth of provisions for alleged mis-selling of US mortgage products, PPI and interest rate hedging products. Changing the bank’s culture will take years. It will doubtless squeeze profits in the short term, but should eventually secure a long-term recovery. At the very least, it should cut down on those multi-million pound fines.
2. Cutting out the toxic shocks.
RBS is the ultimate toxic investment, but it has been cleaning up its act. When Stephen Hester was appointed chief executive in November 2008, RBS had £258bn of unwanted businesses and assets. The toxic pool has been drained so that only around £38bn remain. This has put the share price in bad odour, but, eventually, the stink will lift. The best time to buy is before sentiment turns positive, not afterwards. But you might have to patient before people start liking it again.
3. Painfully, doggedly.
With RBS, it is all too often a case of one step forward, two steps back. It seemed to be making progress in raising its core tier 1 capital ratio, which hit 9.1% at the end of September, but it has since slid back to just over 8%, far short of its goal of 12% by the end of 2016. The target date for selling the taxpayers’ 81% stake in the bank is being pushed back further and further. RBS will look even more lonely and exposed once the Lloyds Banking Group re-privatisation is completed, which will possibly be later this year. RBS also has to pour hundreds of millions of pounds into updating its archaic IT systems. In any normal company, this alone would terrify investors. If you want to make money from RBS, prepare for a string of false starts and stumbles along the way.Â
4. By giving it time.
While management at Lloyds agitates to restart its dividends, RBS chiefs can only twiddle their thumbs. There is still no dividend, and that’s not going to change any time soon. That said, the dividend will return one day. RBS is forecast to yield 1.6% by December 2015. Earnings per share are forecast to hit 16% in 2015. So maybe next year you’ll start to see some kind of reward. Or perhaps the year after.
5. By treating it as a gamble.
I bought shares in RBS a couple of years ago at 210p. Today they trade at 342p. That’s a gain of 60%, which proves you can make money from RBS, if you time your entry right, and are prepared to be patient. The share price hasn’t moved in a year, so this could be a good moment. In the short term, frankly, anything could happen. In the longer run, however, the stock looks less of a gamble. The bad bank has to come good one day. And when it does, today’s investors will feel wealthier for it.