Customer Loyalty Makes Royal Bank Of Scotland Group Plc A Winner For Me

Here’s why I think a loyal customer base means Royal Bank of Scotland Group plc (LON: RBS) is worth buying.

Peter Stephens ❯

Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.

Published 16 October, 2013 8:50 am BST

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

RBS (LSE: RBS) (NYSE: RBS.US) may not strike you as a company that has a particularly large amount of customer loyalty.

However, even the IT difficulties that RBS experienced in summer 2012 (where some account balances were frozen and many customers were unable to make or receive payments) did not cause the loss of a significant amount of custom.

One reason for this could be that the public seem to distrust banks. So, when their bank has a major problem (such as the IT issues that RBS had), provided the problem is addressed through compensation and a raft of apologies, it could actually work in favour for the bank in question, creating more loyalty because customers know that if there are similar problems in future, they should be satisfactorily resolved.

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In other words, people may warm to a bank that is sorry for its mistakes and ensures that customers do not lose out. In my view, RBS continues to benefit from the goodwill that the IT issues created in 2012 because it provided the opportunity for the bank to ‘be more human’ and show that it does care about its customers.

However, customer loyalty is not the only reason I’m bullish on RBS.

Indeed, market sentiment has been improving for RBS in recent months, with the market seemingly hopeful that there will be clarification on whether the bank will be split into two parts. Furthermore, investors have seen the positive impact that re-privatisation is having on the share price of Lloyds and, although RBS is not yet at that stage, it looks set to be sold off by the government in the medium term.

In addition, RBS continues to offer good value at current price levels when using the price-to-earnings (P/E) ratio. Looking ahead to 2014, RBS trades on a P/E of 12.5, which compares favourably to both the FTSE 100 and to the wider banking sector. They have P/Es of 15 and 16.5 respectively, highlighting the good value that shares in RBS currently offer.

So, I’m impressed with the amount of customer loyalty that RBS enjoys (even if it may not be outwardly apparent). Furthermore, continued positive market sentiment and a relatively low P/E mean that I think shares are worth buying at current levels.