Is Royal Bank of Scotland Group plc a stock to buy or sell for 2018?

G A Chester weighs up the investment case for Royal Bank of Scotland Group plc (LON:RBS) a decade on from the financial crisis.

| More on:

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares of Royal Bank of Scotland (LSE: RBS) made rapid gains to over 500p during 2009 as hopes of a speedy recovery from the financial crisis ran high. That early confidence proved too optimistic. Indeed, with the shares now at around 300p, investors who bought between late spring 2009 and early summer 2011 are sitting on fairly hefty long-term losses. And without even the succour of a dividend.

However, a decade on from the financial crisis, is the FTSE 100 pariah bank finally poised to start delivering for investors? Several of my Foolish colleagues have begun to warm to RBS, having previously been cool on it, while long-time arch-banking-bear Neil Woodford has been buying shares in recent months.

Improving outlook

Sentiment has also improved among City analysts with buy/sell recommendations having now swung to 7/3 from 1/13 this time last year, according to data from Thomson Reuters. RBS’s shares have advanced almost 40% over the last 12 months, but upgrades to earnings forecasts mean the stock is still trading on a relatively low earnings multiple of 11.5 times the 2018 consensus.

A forecast dividend of over 3% also provides grounds for confidence. And Morgan Stanley, which this week upgraded RBS to ‘overweight’ from ‘equal-weight’ and increased its target price to 330p from 265p, reckons the bank could afford share buybacks equivalent to 15%-20% of its market capitalisation over time on top of dividends.

The end of RBS’s major litigation costs is also in sight, with the bank expected to settle with the US Department of Justice on the mis-selling of mortgage-backed securities in the next few weeks. While the sum may be substantial — estimates range from £1bn to £5bn — the removal of the uncertainty could be a catalyst for a further improvement in investor sentiment and share price gains.

Macro risk

I see a fair bit of merit in the bull analysis of RBS and I was particularly struck by the suggestion of the Morgan Stanley analysts in their note this week that “substantial deleveraging in its corporate book and less exposure to consumer should see more resilient asset quality performance if macro were to deteriorate.”

However, while RBS might be resilient, it wouldn’t be immune to a significant deterioration. And I believe the risk of such a deterioration has become relatively high. Interest rates are beginning to rise, which is generally beneficial to banks, but the downside of rising rates could well be extremely severe at the present time.

Many businesses that would otherwise have gone to the wall during the financial crisis have been able to limp on only with the crutch of low interest rates. Insolvency specialist Begbies Traynor reported in November that the number of UK companies in “significant” financial distress had reached “unprecedented levels.” With consumer debt also at unprecedented levels, I think rising interest rates are likely to spark a marked increase in both corporate and personal debt defaults — and impairments for banks.

In view of the risk of earnings and dividends being hobbled, and not forgetting that the government still has a 70% shareholding to dispose of, I’m inclined to consider RBS a stock to sell for 2018.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Bearded man writing on notepad in front of computer
Investing Articles

Could a 2025 penny share takeover boom herald big profits for investors?

When penny share owners get caught up in a takeover battle, what might happen? Christopher Ruane looks at some potential…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

3 value shares for investors to consider buying in 2025

Some value shares blew the roof off during 2024, so here are three promising candidates for investors to consider next…

Read more »

Investing Articles

Can this takeover news give Aviva shares the boost we’ve been waiting for?

Aviva shares barely move as news of the agreed takeover of Direct Line emerges. Shareholders might not see it as…

Read more »

Investing Articles

2 cheap FTSE 250 growth shares to consider in 2025!

These FTSE 250 shares have excellent long-term investment potential, says Royston Wild. Here's why he thinks they might also be…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Has the 2024 Scottish Mortgage share price rise gone under the radar?

The Scottish Mortgage share price rise has meant a good year for the trust so far, but not as good…

Read more »

Investing Articles

Will the easyJet share price hit £10 in 2025?

easyJet has been trading well with rising earnings, which reflects in the elevated share price, but there may be more…

Read more »

Investing Articles

2 FTSE shares I won’t touch with a bargepole in 2025

The FTSE 100 and the FTSE 250 have some quality stocks. But there are others that Stephen Wright thinks he…

Read more »

Dividend Shares

How investing £15 a day could yield £3.4k in annual passive income

Jon Smith flags up how by accumulating regular modest amounts and investing in dividend shares, an investor can build passive…

Read more »