How low can the RBS share price go?

Royal Bank of Scotland Group plc (LON: RBS) shares have slumped to prices not seen since 2016. Surely they can’t go down much further?

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How low can the Royal Bank of Scotland (LSE: RBS) share price go? In my mind, I see that question coming from the mouths of shareholders who are at the same time pulling out their hair. And if I had enough hair, I’d have felt exactly the same regarding Lloyds Banking Group on many occasions over the past few years.

It’s picked up a little since but, on 15 August, the RBS share price plunged to a low it hadn’t seen 2016, when it dropped to 176.5p. At that price, full-year forecasts had the shares on a forward P/E multiple of just 6.8, dropping to 6.5 on 2020 predictions.

The current price, of 186p as I write, is a little better. But such a low valuation shows the absolute pariah status of our listed banks today as the looming Brexit train crash continues to terrify investors. It’s not just RBS, of course. We see Lloyds today on a P/E of 6.7, and Barclays the most lowly valued of them all with a multiple of just 6.4 — and that drops to 5.9 on 2020 forecasts. That’s just got to be wrong, hasn’t it?

PPI costs

Something else RBS shares with Lloyds is the pain of PPI compensation costs — not close to the eye-watering level of Lloyds’ £20bn provision, but still painful. As revealed Tuesday, by 30 June RBS had made total PPI claims provisions of £5.3bn, of which £4.9bn has been used.

But claims in August were “significantly higher than expected” with the last few days before the 29 August deadline bringing one final spike. As a result, the bank says it now expects to record an additional PPI charge of between £600m and £900m in its Q3 results, which are due on 24 October.

Perhaps, surprisingly, that latest bit of bad news didn’t seem to have any effect on the share price, but then it’s still quivering from the hammering it’s taken over the past month.

Dividends

One result of the share price slump is a hike in the dividend yield, which is now expected to grow to around 7% this year, and 8% next. That comes after RBS finally returned to paying dividends last year. And that’s something I was always looking for as a sign that our troubled banks were back to robust balance sheets and healthy outlooks.

Optimistic though I am about the UK’s banking sector for the long term, I see little chance of any improvement in bank share prices until sometime after Brexit finally happens (if it happens at all) and until we get some feel for the state of our economy in the months ahead.

Cheap, I say

But even with all that, I still see banking shares as oversold. Investors always over-react, pushing shares too high when things are bullish and too low during bearish times. And I really see a big safety margin for anyone buying RBS shares now.

What could the upside be? My colleague Rupert Hargreaves recently examined the case for a recovery to 400p. Though he felt that’s still a bit too optimistic (and I agree), with a net asset value per share that’s now stretched 56% ahead of the share price, I really don’t see where the downside is at today’s levels.

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.

Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. 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.

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