The Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) recovery has lagged behind that of bailed-out rival Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US), and the share price has suffered as a result.
In fact, while Lloyds shares are up more than 20% over the past 12 months, RBS shareholders have suffered a drop of a couple of percent. And over two years, Lloyds has soared by 180% while at 58% RBS is struggling to reach a third of that.
Lloyds, of course, didn’t have the extra burden of Fred Goodwin, but RBS will recover from his disastrous spell of management, and surely we’ll see a share price recovery — but how much and how soon?
Profit returning
There’s a return to positive earnings per share (EPS) of around 24p currently being forecast for RBS for the year ending December 2014. It does put the 333p shares on a forward P/E of 13.7, which is some way ahead of Lloyds’ levels of around 10 — although P/E values for a company’s first year back into profit often don’t mean very much.
We also have a further rise of 11% forecast for 2015, suggesting EPS of 27p. And we should see the first dividend since the crisis, albeit with a lowly 0.5% yield (Lloyds is on for 2% for 2014, rising to 4.5% in 2015).
How much?
So, what might RBS actually be worth?
Let’s assume a further 11% rise in EPS for 2016 — I really expect more at that stage, but we’ll be conservative. That would provide earnings of 30p per share, and would drop the shares’ P/E valuation to 11. In the longer term, the banking sector will surely be showing P/E values at least in line with the FTSE’s average of 14, especially when dividends become fully re-established.
A P/E of 14 by the end of 2016 would suggest a price of 420p for RBS, for a gain of 26% on today’s price.
Longer term
City analysts don’t seem to share that optimism, at least in the short term, as the consensus is pretty much in the Sell camp. But I suspect that’s largely due to the more bargain-priced valuations of competitors like Lloyds, and even Barclays.
But RBS will come back, and this gives us some idea of how much the shares might be worth when it does. First-half results will be out in August, and could make a big difference.