It’s not exactly news that Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) has been a dreadful performer over the past decade, but its record of turning every £10,000 invested 10 years ago into just £500 is truly shocking!
But the years of losses are coming to an end, with a pre-tax profit of around £4.2bn forecast for the year to December 2014 — the company recorded a massive loss of £8.2bn last year, so that’s certainly some growth.
Three profitable quarters
Q3 this year marked RBS’s third quarter of profits in a row, with a pre-tax profit of £1.27bn. That compares well to the equivalent second-quarter figure of £1.01bn and is streets ahead of the £634m lost in the third quarter of 2013.
The RBS share price has been on the way back up since as early as mid-2009, and over the past 12 months it’s responded to the improving sentiment with a 16.4% rise — the FTSE 100 has lost 4% over the same period.
But there are big questions. Can the expected growth for this year be sustained, and has the share price rise gone too far too soon?
Hefty costs
Something that is still sounding a caution is the sizeable sums the bank is still having to set aside to cover bad debts and bad behaviour. In the third quarter a further £801m was added to impairment provisions, and another £780m was earmarked for the costs of litigation and conduct issues. That’s more than was set aside in the entire first half, when chief executive Ross McEwan spoke of “significant conduct and litigation issues that will likely hit our profits going forward“.
Forecasts for 2015 actually indicate a fall back in earnings per share (EPS), to 31.8p — that’s a drop of 9% from the 34.9p expected this year.
But against that, RBS is a smaller and leaner outfit now, as it has been divesting itself of profitable subsidiaries. On top of Direct Line Insurance, it is in the process of floating Citizen’s Bank. 140 million shares, representing 25% of it, are set to be sold off at a price of $21.50 (with an optional 21 million extra to underwriters). RBS expects to realise gross proceeds of between $3.01bn and £3.46bn depending on the full amount sold.
Buy for future growth?
It looks like RBS’s core profitability and earnings growth are set to improve further over the next few years, but are the shares good value now?
On a P/E of 11, rising to 12 on 2015 forecasts, I still don’t think so — not while Lloyds Banking Group can be had at multiples of 9.8 and 9.3 respectively (even if there is a setback in the resumption of dividends).