Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US) is coming under selling pressure, as fears grow that Scotland will vote yes to independence on 18 September.
Although we cant know what the outcome of the referendum might be or how it might affect RBS we do know that the banks current share price is almost unchanged from one year ago.
Since then, RBS has made considerable progress with its turnaround plan, and is expected to report a full-year profit of around 3bn for 2014. This suggests to me that RBS shares could be attractive at todays price, so Ive been taking a closer look, to see if the banks fundamentals support this argument.
Valuation
Lets start with the basics: how is RBS valued against the markets expectations of future performance?
|
P/E ratio |
Current value |
|
2-year average forecast P/E |
11.3 |
Source: Consensus forecasts
RBS is expected to report earnings per share of around 30p for 2014 and 2015. On this basis, RBS trades on a forecast P/E of 11.3, which doesnt look too demanding.
What about the fundamentals?
A lot has changed at RBS over the last five years. In the table below, Ive calculated the five-year rate of change for three of the banks key metrics:
|
5-year compound average growth rate |
Value |
|
Net income |
-9.3% |
|
Net interest margin |
+2.7% |
|
Loan:deposit ratio |
-7.0% |
Source: Company reports
Although the RBSs net income has fallen by 9.3% per year over the last five years, this is to be expected, as RBS has disposed of a number of non-core assets and operations, including Direct Line Insurance Group, during that time.
One positive is that RBSs net interest margin, a key measure of profitability, has risen by nearly 3% per year, on average, since 2009.
A second positive is that the banks loan:deposit ratio has improved, falling by an average of 7% per year from its 2009 value of 135%, to 94% at the end of 2013. A loan:deposit ratio of more than a 100% indicates that a bank has loaned more money than it has taken in deposits, and is considered risky.
Below book value
A final point is that RBS continues to trade below its tangible book value per share the theoretical break-up value of the bank, excluding any goodwill attached to the banks brand.
This can indicate a value opportunity, but in the case of a bank, may also indicate that the market believes further asset write-downs will be needed: RBSs net tangible asset value per share has fallen from 446p at the end of 2012, to its current value of 376p per share.
Buy, sell or hold RBS?
Overall, I rate RBS as a hold at the moment, as I think the risks are quite evenly balanced. Ultimately, however, it’s your decision — but before you consider buying or selling shares in any UK bank, I would urge you to take a look at “The Motley Fool’s Guide To Investing In Banks“.
This FREE, no-obligation report provides six important valuation ratios for each UK bank, along with exclusive analysis from the Fool’s expert banking analysts.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
