Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US) is coming under selling pressure, as fears grow that Scotland will vote ‘yes’ to independence on 18 September.
Although we can’t know what the outcome of the referendum might be — or how it might affect RBS — we do know that the bank’s current share price is almost unchanged from one year ago.
Since then, RBS has made considerable progress with its turnaround plan, and is expected to report a full-year profit of around £3bn for 2014. This suggests to me that RBS shares could be attractive at today’s price, so I’ve been taking a closer look, to see if the bank’s fundamentals support this argument.
Valuation
Let’s start with the basics: how is RBS valued against the market’s expectations of future performance?
|
P/E ratio |
Current value |
|
2-year average forecast P/E |
11.3 |
Source: Consensus forecasts
RBS is expected to report earnings per share of around 30p for 2014 and 2015. On this basis, RBS trades on a forecast P/E of 11.3, which doesn’t look too demanding.
What about the fundamentals?
A lot has changed at RBS over the last five years. In the table below, I’ve calculated the five-year rate of change for three of the bank’s key metrics:
|
5-year compound average growth rate |
Value |
|
Net income |
-9.3% |
|
Net interest margin |
+2.7% |
|
Loan:deposit ratio |
-7.0% |
Source: Company reports
Although the RBS’s net income has fallen by 9.3% per year over the last five years, this is to be expected, as RBS has disposed of a number of non-core assets and operations, including Direct Line Insurance Group, during that time.
One positive is that RBS’s net interest margin, a key measure of profitability, has risen by nearly 3% per year, on average, since 2009.
A second positive is that the bank’s loan:deposit ratio has improved, falling by an average of 7% per year from its 2009 value of 135%, to 94% at the end of 2013. A loan:deposit ratio of more than a 100% indicates that a bank has loaned more money than it has taken in deposits, and is considered risky.
Below book value
A final point is that RBS continues to trade below its tangible book value per share — the theoretical break-up value of the bank, excluding any ‘goodwill’ attached to the bank’s brand.
This can indicate a value opportunity, but in the case of a bank, may also indicate that the market believes further asset write-downs will be needed: RBS’s net tangible asset value per share has fallen from 446p at the end of 2012, to its current value of 376p per share.