Royal Bank of Scotland (LSE: RBS) was one of the Footsie’s biggest fallers Thursday, losing 10% of its share price and pushing its 12-month fall to 25%.
It’s also been by far the worst performer of the big listed banks since the financial crisis. In the decade and more since the FTSE 100 hit bottom in February 2009, RBS is the only one whose price has actually fallen further.
RBS has just come bottom of the customer satisfaction rankings once again too. The UK’s competition watchdog insists that banks carry out surveys twice per year and prominently display the results. And RBS was soundly beaten by Metro Bank and First Direct (a division of HSBC) in top place, which saw 82% of their customers say they’d recommend them to family and friends.
Buy the challenger?
Metro Bank shares have lost 90% of their value in the last 12 months, after a serious accounting error meant it had to seek more than £350m to shore up its balance sheet. It’s now on the lookout for a new chairman after deciding to dispense with founder Vernon Hill, and the news that its loans now exceed its deposits mean I wouldn’t buy the shares until I see better financial discipline firmly established.
Though analysts are expecting to see Metro Bank’s earnings per share fall by two thirds this year, they do have a fairly rapid 38% recovery pencilled in for next year. That would give us a 2020 P/E of 18, which might look high compared to the banking sector in general — RBS shares are on a forward P/E of a lowly 7.5, for example. But Metro is still a very small player in a big business and has significant growth potential, and that valuation could quickly drop if we see a couple of years of good growth.
But on top of its accounting-led woes, Metro has also suffered from the gyrations that often afflict growth shares. Its P/E was pushed up close to 200 in 2016 by over-exuberant ‘jam tomorrow’ expectations. And though I am a fan of challenger banks, I want them to be a lot less exciting than this.
Back to RBS
I’ve been cautiously bullish on Royal Bank of Scotland for some time, as it’s returned to profit and paid its first post-crash dividend last year with a yield of 2.5%. Forecasts have been suggesting that yield could rise to 6.5% this year, but that was before the bank reined in its optimistic expectations and admitted that “it is very unlikely that we will achieve our target return on tangible equity of more than 12% and cost:income ratio of less than 50% in 2020.”
I still think RBS should be a good long-term investment, but as the weakest of the big UK banks following the crisis and with the tardiest timescale of getting back to sustainable profits, I can’t help feeling it could be disproportionally hit by any new pressure on the banking sector. And with all this talk of recession and no-deal Brexit, renewed pressure seems assured.
If I owned RBS shares I’d still hold, but while I think the chances of the price falling further are high I’m not buying — I’m going to wait and watch.
