Concerns over the health of the UK economy in 2017 have done little to dent investor demand for banking colossus Royal Bank of Scotland (LSE: RBS).
Its share value has surged 53% from the lows hit following June’s Brexit referendum, levels not hit since the chaos of the 2008/09 financial crisis. This spurt now leaves RBS dealing on a forward P/E ratio of 13.5 times.
While this number is hardly shockingly high — indeed, this figure is some way below the FTSE 100 prospective average of 15 times — I believe it still fails to reflect the huge obstacles RBS faces on the road back to earnings growth
The bank’s aggressive asset divestment plan, moves designed to de-risk its operations and rebuild the balance sheet following the banking crisis, has long cast concerns over how RBS will create strong revenues in the years ahead. And this was before Britain voted to leave the EU, a decision that could have significant impact on domestic economic growth, and with it revenues at RBS, long into the future.
Elsewhere, concerns are also rising over how much RBS will be forced to fork out in litigation related to the mis-selling of mortgage-backed securities in the US almost a decade ago.
The company raised the amount it had set aside for the fourth quarter by a further £3.1bn, it announced late last month, taking the total to a staggering £6.7bn. But this isn’t the only legacy issue steadily draining the balance sheet, of course, with a steady rise in PPI-related claims at home exerting added pressure.
With RBS already falling short of Bank of England stress tests yet again in November, and the firm still a long way from printing meaningful top-line expansion, I reckon cautious investors should use recent share price strength as a fresh selling opportunity.
Supermarket strains
The news over at grocery giant WM Morrison Supermarkets (LSE: MRW) has been far more promising in recent months, with yet more bubbly sales data propelling the stock to fresh three-year peaks just this week. The retailer has risen 28% during the past six months alone.
And Kantar Worldpanel data this week showed Morrisons’ till rolls tick 1.9% higher during the 12 weeks to January 29, helping the business gain market share for the first time since the summer of 2015.
But while moving back in the right direction, I believe Morrisons has a terrible fight ahead of it to maintain its recent impressive top-line momentum.
The discounters continue to make exceptional progress, illustrated by Aldi’s recent coronation as Britain’s fifth largest supermarket, and are likely to continue to do so as their bricks-and-mortar presence improves across the country. And Morrisons’ recently-launched online operations are also likely to come under sustained pressure as all of Britain’s retailer’s improve their internet services, while the aggressive entry of Amazon throws another potential spanner in the works.
I reckon these problems fail to be reflected in Morrisons’ elevated forward P/E ratio of 20.5 times, and believe this leaves the grocer in danger of a sharp share price retracement should sales data begin to disappoint.
