One of the investing stories of 2013 was the rise of the banks from the wreckage of the credit crunch and the eurozone crisis. Seen as contrarian plays, shares of financials such as Lloyds and Barclays rocketed.
But Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) seemed to be left behind, with the share price seemingly interminably range-bound. We at the Fool have written many articles about banks such as Barclays and Lloyds, but we have written fewer about RBS.
An astonishing amount of debt
Both writers and investors have been put off by the astonishing amount of debt that RBS has built up because of its ill-timed takeover of ABN Amro at the height of the financial crisis. Estimates of the amount of debt built up by this company since the crisis of 2008 have ranged around the mind-boggling sum of £46 billion.
How on earth can you turn round so much debt? Well, substantial amounts of the company have been sold off, including hundreds of bank branches and Direct Line Group. Bad debts have been substantially reduced. But what is the crucial part of this turnaround? What will trigger a rising share price and reward long-suffering shareholders?
I think the market is waiting for a return to profitability. Once the company clearly shows its first profit since the crisis, I expect the share price to take off. But when I mean profit, I mean the real profit, after all the impairment charges have been taken into account. The question is, when will this happen?
However, profitability could soon return
Well, currently RBS is still loss-making. However, interestingly, consensus estimates that RBS will return to profitability in 2014, with stronger profitability coming through in 2015. However, consensus has a habit of overestimating RBS’s profitability.
So what is the real picture? Well, with a company with such a complex balance sheet, it is very difficult to predict when the long-awaited return to profitability actually happens. So I would advise a wait-and-see approach. Keep the company on your watch list, and see how it does in its next set of end-of-year results. But I suspect that a return to profitability is not far away.
We have seen with companies such as Aviva that when the turnaround comes, the company could be a real buying opportunity, with the share price surging ahead.