It was dubbed the worst banking acquisition of all time.
Sir Fred Goodwin led a series of acquisitions (including the purchase of NatWest) that turned the Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US) into an international banking giant. It all ended abruptly though with the 70 billion purchase of ABN AMRO. Not only was that deal structured poorly (certainly not in favour of RBS), but its timing (on the eve of the crisis), couldnt have been much worse. Over a matter of months, RBSs share price fell from over 6 pounds to 10p.
The prodigal son had to return home. It was bailed out by the state. Its now 81% owned by the UK government.
So, given all of that, can we now bank on an RBS turnaround? Lets look at the three Cs of banking.
Cash
The best news about RBSs bottom line is that its seemingly improving. That is, back in May it proudly announced a big jump in its first quarter net profit. It trebled its earnings to 1.2 billion. According to Reuters it was just the 6th time the bank had produced a quarterly profit since it was bailed out. Analysts have pointed to the banks better handle on costs, and reduced losses from bad loans, as the reasons the banks pushed back into the black.
Its also good to see the banks core business improving. Its net interest margin for the first half rose 20 basis points to 2.17%. Thats moving up towards Barclays NIM at 2.96% (up 8bps on its previous result).
So there are a few green shoots coming through but some investors remain shy. The stocks price to book ratio is just 0.6. Any decent banking analyst will tell you thats either a really good sign, or an ominous sign.
Compliance
RBs has a few skeletons in the closet.
In 2013 RBS was fined 390 million for Libor rigging. This coming from a bank that had been bailed out (and is now majority owned) by the taxpayer. That calls for more than just a good spanking. The banks also been done for the miss-selling of home loans in the U.S..
Confidence
So the big news is that chairman, Sir Philip Hampton, is moving to GlaxoSmithKline. The search for a new skipper is under way, but whoever it is, he or she will need to have a strong handle on negotiating with the government given Treasurys hold over the bank. This is an awkward issue for the bank.
Looking at its recent strategic plays: Im not overjoyed by its recent stumble in the U.S.. RBS originally wanted to sell Citizens for between $23 (14) and $25 a share but the initial public offering was priced at just $21.50. RBS will pocket around $2 billion less than hoped for as a result. Its my understanding that RBS will look to offload the rest of the bank by 2016. Now analysts say the sale was a response to the governments and regulators call for RBS to focus on lending to U.K. customers and increase its capital strength. See this is what happens when you still live with your folks you cant make grown-up decisions.
Bonuses are another pain in the bum for the bank. Labours been crying foul that bankers on multi-million pound salaries are getting paid million dollar bonuses. Of course the tax payer foots that bill. Bonuses have already been cut by around 85% (yes they were that high to begin with) but they could go down further. Theyre certainly not going to rise, putting up enormous barriers for the firm to attract the best talent in The City.
The bank says its doing just fine. Its even confident itll achieve a Tier 1 capital ratio (a key measure of a banks financial strength) of 11% by the end of 2015. Thats noteworthy.
So yes the banks on track, but it hasnt yet recovered from the financial crisis of 2008/2009. As an indicator, the banks share price remains well below the 500p level where the taxpayer breaks even on its 45 billion stake in the bank.
Ill confidently step onto the ship when all the bail water has returned to the ocean. No need to take unnecessary risks right now.
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The Motley Fool has recommended shares in GlaxoSmithKline.
