Today I am explaining why I believe Royal Bank Of Scotland (LSE: RBS) (NYSE: RBS.US) is a perilous pick for seekers of long-term earnings growth.
Earnings volatility predicted to reign
Royal Bank of Scotland has hardly been a convincing pick for those seeking long-term dependable earnings growth in recent times. Despite a programme of aggressive de-risking through ongoing asset sales, not to mention a further bolstering of the balance sheet by en
gaging in extensive cost-cutting across the business, the company has still failed to punch two years of consecutive growth since the 2008/2009 banking crisis ripped out the bottom line.
The City’s number crunchers believe that Royal Bank of Scotland’s hard labours — combined with the run-off of various legacy issues — are set to deliver a meaty improvement this year, and expect the company to swing from losses of 38.3p per share in 2013 to earnings of 28.9p per share.
But beyond this year many analysts believe that the rapid descaling of the business is likely to weigh heavily on the bank’s growth prospects in coming years, and anticipate a 2% decline next year to 28.4p per share.
A dear pick for diddly earnings growth
Indeed, the firm’s aggressive departure from what it deems non-core businesses and refocus on the its UK retail operations continues to drive revenues through the floor, and total income slipped almost 10% during April-June to £5.4bn.
As well, Royal Bank of Scotland is also set to keep on shelling huge sums for a variety of misconduct issues, and Investec expects the bank to incur an additional £3.6bn worth of incremental charges through to 2016. But with new cases continuing to emerge — such as recent claims that it sold junk mortgage bonds from 2004 to 2010 — it is impossible to put a cap on possible litigation charges.
Given current earnings forecasts, Royal Bank of Scotland can hardly be described as irresistible value for money. The firm currently deals on P/E multiples of 12.4 times and 12.6 times prospective earnings for 2014 and 2015 correspondingly, comfortably above the bargain yardstick of 10 times which I believe it should be camped under given its meagre growth prospects and ongoing legacy issues.
And investors can also find better value from fellow UK banking stalwarts Lloyds Banking Group, Barclays and HSBC, which carry forward multiples of 9.8, 11.2 and 12.1 correspondingly and have far better earnings potential in my opinion.