You don’t have to love every company in your investment portfolio. If you did, few of us would hold Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US).
Frankly, what’s to like?
Just when you thought RBS couldn’t behave worse, it did. Now it stands accused of deliberately killing off small business clients then stripping their assets. Chief executive Ross McEwan says there is no proof for the allegations, but the Serious Fraud Office has now launched a criminal enquiry. Some worry about reputational damage, to which you can only say: what reputation?
The scandals keep on coming
RBS could still face more fines from regulators over the US sub-prime mortgage crisis, according to Robin Budenberg, chairman of UK Financial Investments, the body responsible for the government stake in RBS and Lloyds Banking Group. He noted that JP Morgan was recently hit by a $5 billion fine to settle a series of claims relating to mortgage-backed securities, and suggested RBS was also vulnerable. It has only just paid US regulators $150 million after cutting corners in selling $2.2 billion of mortgage-backed bonds, and is being sued by Fannie Mae over alleged Libor fixing. Plus there are those foreign exchange rigging allegations, Euribor, PPI…
Now it’s a devolutionary football
Last year, RBS threatened to quit its Edinburgh headquarters if the Scots voted for devolution. As the vote moves closer, the debate over who gets RBS, the English or the Scots, will only intensify. Will RBS be split between the two countries? And if so, who gets the good bank and who gets bad bank? The RBS balance sheet is still £1.3 trillion, roughly eight times the size of Scottish GDP, which could dramatically raise its risk profile and make it hard to raise finance. I can’t imagine what this will do to the share price.
It could also become an electoral football
RBS is still 81% owned by the taxpayer, but any privatisation won’t happen this side of the May 2015 election. RBS is in the process of draining its toxic assets into a bad bank, in the hope its good side will shine more brightly. But it will be a slow process, and with so many hurdles to overcome and legacy issues to resolve, even the most far-sighted investor could start to lose patience.
All this and no dividend either
Some analysts claim RBS could start dishing out a dividend from 2015. But for now, there is nothing. Zilch, nada. And the share price is volatile, down 10% in the last month. Plus it trades at a pricey 20 times earnings, compared to 8.2 times earnings for Barclays. So RBS isn’t cheap, according to that traditional measure. But what I really hate about RBS is that I can’t let go with it. I suspect that if I sell, the stock will fly. Forecast earnings per share growth of more than 60% in 2014 is keeping me hooked. I’m tied to this stock, and I really hate that.
