Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US) has come in for a lot of criticism for its failure to deliver a Lloyds Banking Group-style turnaround. Some of this may be justified, but it’s worth remembering that for some investors, RBS has delivered a very profitable performance — and I believe there’s more to come.
A classic value buy
In the summer of 2012, RBS’s share price collapsed, falling to around 200p, despite the bank reporting a net tangible asset value per share of 501p per share just a few months earlier.
One reason for the collapse was that investors didn’t trust the value of the assets on RBS’s balance sheet. However, traditional value investing places a lot of weight on buying companies trading below their net asset value, and the opportunity to buy shares in a FTSE 100 firm trading at half its book value was very tempting to some investors — and has proved very rewarding.
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Since August 2012, RBS’s share price has gained around 40%, compared to a rise of just 18% for the FTSE 100. Although RBS’s tangible asset value per share has fallen, it’s only dropped to 363p, suggesting that the market was being overly pessimistic in 2012.
Was it just luck?
It’s easy to forget that in 2012, things looked pretty grim. The euro was in danger of collapsing, Spain, Portugal, Italy and Greece were all at risk of defaulting on their government bonds, and the UK economy was still stick in a deep recession.
RBS didn’t offer any of the other typical characteristics of value shares, such as a low P/E, or a high yield, either — it was a pure asset play, with the added risk of political interference and potential nationalisation.
Is RBS still a value buy?
The question for investors today, of course, is whether RBS is still a solid asset-backed value buy, or whether that opportunity has passed.
RBS shares are changing hands for around 306p as I write, putting them at a near-20% discount to the bank’s tangible asset value per share of 363p. Although this discount isn’t as big as it was back in 2012, I believe the risks are lower too.
In my view, RBS continues to offer asset-backed upside to investors, and this should increasingly be backed by profits. The latest analysts’ consensus forecasts show RBS trading on a forecast P/E of 14.6 in 2014, falling to 11.1 in 2015.
