Today I am looking at why I believe Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US) remains an extremely risky stock selection.
Provisions keep on piling up
Royal Bank of Scotland — like many of its peers across the banking sector — is still having to boost provisions to cover the cost of previous legal scandals. The firm announced just last week that it has had to provide another £1.9bn for issues related to “mortgage-backed securities and securities related litigation;” a further £465m for the improper sale of PPI; and another £500m for the mis-selling of interest rate hedging products.
And the costs of these legacy actions to Royal Bank of Scotland are likely to continue racking up. For interest rate product claims alone, latest data from the Financial Conduct Authority showed some 2,092 claims settled in January at an average settlement of around £146,000. But as Investec points out, “anecdotal evidence continues to suggest that more expensive cases are underrepresented in this data, so average costs are likely to rise.”
Dividend dilemma reigns
Unlike Lloyds Banking Group — which of course is also part-owned by the British taxpayer — questions remain over when when Royal Bank of Scotland will again start forking out dividends. Lloyds announced last week that the Prudential Regulatory Authority (PRA) has said that it will consider the bank’s proposals for paying out dividends in the near future.
No such noises have come out of Royal Bank of Scotland, however, and City analysts are split on when the firm will be able to get its payout policy back on track. Indeed, Investec does not expect the first dividend to materialise until next year at the earliest, with a 10p per share payment anticipated. And even then dividends are likely to lag those of its industry rivals — such a payment would create a 3% yield versus a forward average of 3.8% for the complete banking sector.
The long road to modest recovery
Although Royal Bank of Scotland continues to drag itself away from the mire associated with the 2008/2009 financial crisis, the bank’s recovery continues to rumble along at an alarmingly pedestrian pace. Indeed, Investec notes that the bank’s “recovery in profitability will remain painfully slow,” and “expect that it will not achieve a return on equity above the cost of equity before 2018.”
The bank’s quest to deliver a more streamlined, low-risk entity is seriously threatening to derail its future growth potential — non-core asset stripping accelerated during September-December, the company said last month — while the cost of restructuring also continues to mount. In my opinion, there are a host of more appetising banking picks out there for savvy investors.