Could this looming threat destroy RBS and every other FTSE 100 bank?

Harvey Jones warns that Royal Bank of Scotland (LON: RBS) and the big FTSE 100 (INDEXFTSE:UKX) banks are facing disruption on a massive scale.

| 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.

For the last 12 years, the banks have lurched from one crisis to another. None more so than Royal Bank of Scotland (LSE: RBS), which taxpayers were forced to bail out to the tune of £45bn. There could be more trouble ahead, so watch out.

It’s an absolute scandal

The sector has been rocked by a host of lesser scandals since the financial crisis, including PPI, Libor-fixing, money-laundering and much more. The recovery process has been slow and the losses have continued to mount. Last year, chairman Sir Howard Davies said RBS had lost £130bn over the decade after it was rescued.

These are huge, especially when set against its market-cap of £29bn. Loyal investors have also suffered, with the RBS share price a third lower than it was five years ago. At least it now pays a dividend, currently yielding 2.3%, with the promise of more to come. So would I invest in it now?

Many will be tempted by the 16% jump in its share price over the last month, as investors celebrated the final deadline on PPI claims and the appointment of new CEO Alison Rose. And a potential Brexit resolution.

That’s a massive yield

Short-term forecasts are good, with City analysts anticipating a 90% leap in earnings this year, which could lift the yield to 10.4%. That’s forecast to fall to 5.7% in 2020, but still more than respectable. The bank looks cheap too, trading at just 9.5 times forward earnings, with a price-to-book ratio of just 0.6 (where 1 = fair value).

Before you part with your money, a word of warning. Banks like RBS are on the frontline when the global economy slows. Their personal and business borrowers are more likely to default, while continued low interest rates squeeze net lending margins.

There is a longer-term worry. I’ve just read a report by Vincent Vinatier, manager of the AXA WF Framlington Fintech Fund, who’s warning that global banks must spend hundreds of billions on IT systems to compete in the digital world.

Deadly disruption

Globally, they must lavish a “mind-boggling” sum of nearly $300bn by 2021, and the costs will continue to rack up as they fight off the challenge from online and app-based start-ups.

Vinatier warns that too many established banks have clunky systems, and that upgrading them is complex and costs typically overrun. The big banks also have to fund “a move to the cloud and constant investment in cyber-security.”

He wasn’t specifically talking about RBS, but it will be hard for such a major player to compete against nimble new fintech operations, which customers can quickly download onto their phones to see how they’re getting along. For now, they’ve focused on services such as savings rates and currency transfers, but that’s steadily broadening.

Warren Buffett favours stocks with wide and sustainable “economic moats,” protecting them from competition, and the banks have long been protected by their scale, and customer inertia. As the digital disruptors put the retail banking model under siege, that moat is slowly evaporating. You have been warned.

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.

Harvey Jones 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

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »