Chancellor Hammond starts to reduce State exposure to the incredible shrinking bank

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“George Osborne received all sorts of criticism when he sold a 6% stake in Royal Bank of Scotland at 330p a share, for a £1 billion loss, back in 2015, so his successor Philip Hammond was always going to get a hard time if he sold any further Government holdings at less than the taxpayer’s 502p purchase price. Patriots may also be disappointed to note that the four lead investment banks who co-managed the deal were all American, although RBS may not have been too keen to work with direct local competitors such as HSBC and Barclays anyway,” says AJ Bell Investment Director Russ Mould.

“The issue now for investors is whether they should take a fresh look at RBS or not – especially as the nature of today’s book-building process meant that institutional investors and hedge funds were able to participate in the Government sale and private individuals were not.

“The Government’s renewed commitment to liquidating its remaining 62% stake is a potential negative, as such an overhang of stock means there will be no shortage of paper available over the coming years, even if RBS hopes to launch a share buyback at some stage, to help the process along.

“It is therefore the job of RBS boss Ross McEwan and his team to help the bank develop a consistent track record of growing profits and ultimately dividends – since it was a return to the dividend list at Lloyds which helped the Government to reduce its stake in that high street lender with what proved to be relatively little fuss, despite the occasional false start.

“If RBS can stick to the mantra outlined in its 2017 Annual Report – “Simple, safe and customer focused” – then that would be a good start, and the bank is much smaller and less complex than it was 10 years ago at the time of the financial crisis and the company’s own self-inflicted woes.

“Multiple disposals – Hoare Govett, Direct Line, WorldPay, Aviation Services, Coutts International and Citizens to name but a few – mean the bank has shrunk its risk-weighted asset base from £578 billion to £203 billion. That is a good start.

CH1

Source: RBS accounts

“In addition, RBS does not look unduly expensive at one times tangible net asset value per share (the amount that would be left to shareholders were the bank to suddenly liquidate itself, selling all of its assets and settling all of its liabilities at the prices and valuations presented in its last publicly published balance sheet).

 

 

2018E

 

 

 

P/E

Price/book

Dividend yield

Dividend cover

Standard Chartered

14.3 x

0.83 x

2.4%

2.9 x

Barclays

10.6 x

0.84 x

3.1%

3.1 x

Royal Bank of Scotland

11.6 x

1.07 x

1.8%

4.7 x

Lloyds

9.2 x

1.25 x

5.1%

2.1 x

HBSC

14.1 x

1.42 x

5.0%

1.4 x

Source: Digital Look, consensus analysts’ forecasts

“For investors to want to pay a higher multiple than that, the bank will have to boost its return on equity, by managing its costs, boosting profits and allocating capital efficiently, and also start to pay that elusive dividend – the first at the bank since 2007, when RBS paid 32.2p a share to its investors.

“That was worth £3 billion in total and a return to that on the new share count, adjusting for the subsequent bail-out, would take the dividend to 25.5p a share, equivalent to a 9% dividend yield.

CH2

Source: RBS accounts. 2005-2007 payments adjusted for current share count. Actual payments at the time were 20.2p. 25.8p and 32.2p per share

“Such figures are clearly some way off but RBS has, at least in theory, overcome all of the three key obstacles which were preventing it from returning to the dividend list at all.

  • Although it failed to sell or spin-off Williams & Glyn to satisfy EU state-aid and competition rules, RBS has agreed to a £800 million package whereby it will put money into a Capability & Innovation Fund and an Incentivised Switching Scheme, to boost the development of fintech competitors and help business customers find a new lender, should they wish to do so.
  • RBS reached a $5.5 billion settlement with the US Federal Housing Finance Agency for the alleged mis-selling of mortgage-backed bonds in summer 2017
  • RBS has reached, in principle, a $4.9 billion deal with the US Department of Justice over the alleged mis-selling of mortgage-backed securities

“The Q1 2018 stated pre-tax profit of £1.2 billion was a step in the right direction toward building an improved profitability record. RBS will be hoping that the 2019 deadline for PPI claims can help it remove another cost burden from its profits.

CH3

Source: RBS accounts

“But the bank still needs to keep its nose clean, manage its loan book effectively and hope that the global economy does not roll over, even if analysts have pencilled in forecast dividend payments of 5.4p a share for 2018 and 12.2p for 2019.”

These articles are for information purposes only and are not a personal recommendation or advice.


The chart of the week is written by Russ Mould, AJ Bell’s Investment Director and his team.