It’s a curious thing to see the Royal Bank of Scotland Group (LSE: RBS) share price tear away at the start of 2019.
The bank’s value has swelled 10% since the turn of January despite its profits outlook becoming even more cloudier in that time. Concerning Brexit, I remain unchanged in my belief that the possibility of a no-deal withdrawal transpiring is remote given the wrecking ball this would drive through the domestic economy.
But there’s no denying that the chances of this scenario are growing as the EU withdrawal date of March 29 draws closer and Westminster remains in a state of paralysis. This is something which the market seems not to be considering right now as it frantically snaps up RBS and its domestically-focussed peers.
As S&P Global Ratings worryingly predicted in recent days: “A no-deal Brexit could result in severe macroeconomic weakness, which would lead to rising personal and corporate UK insolvencies and weaker collateral values. In time, this would likely play through to banks’ asset quality and activity, undermining earnings and, possibly, capitalisation to a modest degree.”
Oof! More worrying data
Even if the UK does indeed swerve away from the cliff edge and avert a disorderly exit, the country remains on course for some form of Brexit. And as government analysis has shown, even the ‘softest’ of withdrawals would have a damaging effect on the national economy.
Times are already tough for the likes of RBS. Latest data from the Bank of England showed the rate of unsecured consumer lending rose 7.1% in November, down 30 basis points from the prior months, and representing the lowest pace of annualised growth for close to four years.
It’s no secret that Britain is living under a debt mountain, exacerbating this recent demand decline for credit services. According to the trade union TUC, households now owe on average a record £15,385, the body advising that “years of austerity and wage stagnation has pushed millions of families deep into the red.” This threatens to explode in the face of RBS and its peers as the economy rapidly cools.
6% yields? No thanks
An expected 2% earnings decline in 2019 leaves RBS dealing on a dirt-cheap forward P/E ratio of 8.8 times. Cheap, sure, but not cheap enough for me considering that this estimate, along with the predicted earnings rebound for next year, are in severe danger of being blown off course.
I’m also tempted to overlook the bank despite its podgy 5.3% dividend yield for this year and its 6.7% yield for 2020, too.
City analysts are expecting the Edinburgh-based bank to lift an anticipated 7.1p per share reward for 2018 to 12.8p this year, and to upgrade it again to 16.1p next year. I’m more than a little sceptical about these predicted dividends, though, owing to the toxic threat of slumping revenues, spiking impairments, increasing PPI-related penalties, and a weak balance sheet deteriorating further. There’s many, many more FTSE 100 dividend stocks I’d buy before even considering splashing the cash with RBS.
