The Royal Bank of Scotland (RBS) has seen its fair share of trouble in the past few years. It went through a significant number of legal proceedings during 2017-2019 including one from its own shareholders who claimed they were misled by the management regarding the bank’s financial performance. This led to a settlement of nearly £1bn back then.
Nevertheless, the bank remains strong when it comes to its financials as it has shown consistent growth in its EPS throughout the years following the lawsuits. Yet the markets appear to be focused on the long-term outlook of the company as the price has dropped significantly since its CEO announced that he was reducing his forecasted net tangible equity returns for 2020 and forward from 12 to 9 per cent.
As a result, investors seem to have revised their RBS share price forecast as the stock has been on a downward spiral since its FY 2019 financials were released in February.
It is important to note that the bank is currently undergoing a restructuring process that involves renaming the company to “NatWest Group”. This is part of an effort to leave behind certain situations that have hurt the business’ credibility over the past few years. Even so, the company plans to maintain its current operational, organisational structure and business model as it is.
Royal Bank of Scotland (RBS) shares are primarily traded on the London Stock Exchange (LSE) and the company currently has a market cap of £17.10bn. Additionally, here are some of the most relevant stock market metrics for RBS stocks:
- 1-Year Return: -38.35 per cent
- Reported EPS: £0.26
- Dividend Yield: 3.54 per cent
- Price/Book: 0.44
- Price/Sales: 0.92
- P/E Ratio: 5.44
The following aims to provide a summarised analysis of the company’s current financial situation, along with RBS share price prediction and other relevant stock market information that might be useful to answer the following question: are RBS shares buy or sell?
RBS stock analysis
RBS stock price started to tumble in December 2019 when the company disclosed that it had paid nearly £40m to more than 700,000 customers as part of a settlement regarding a case on FX transaction manipulations.
Nevertheless, the largest drop started back on February 14 after the company unveiled its FY 2019 results and the CEO decided to cut his outlook on the potential long-term Return on Tangible Equity (RoTE) from 12 per cent to a range of 9 to 11 per cent for subsequent years.
This news affected the company’s valuation as investors fear that the company is acknowledging a potential business model issue and not just a financial adjustment. As a result, RBS shares have lost nearly 62 per cent in less than a month while losses have also been fuelled by the sell-off triggered by the coronavirus.
The stock is now trading at £140, exactly at its 52-week lowest point, and 47 per cent lower than its 52-week high of £265. Additionally, the stock is also trading at a price that’s 36.2 per cent lower than its 100-day Simple Moving Average (SMA).
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Meanwhile, Royal Bank of Scotland share price forecast put the price of the stock in a range that goes from £235 to £350 according to 18 analysts surveyed by Yahoo Finance. This appears to indicate that there’s optimism regarding the bank’s future performance and potential growth.
Latest financial information about Royal Bank of Scotland (RBS)
There’s a lot of good news in RBS’s FY 2019 annual report, including an EPS growth of 92 per cent compared to 2018, as the company ended the year generating an £0.25 in Earnings per Share.
Most of this positive performance can be attributed to a 31 per cent increase in the bank’s non-interest income, which ended the year at £6,206bn. Positive cost-cutting efforts also saved the bank approximately £300m during 2019.
Retail (£4.9bn) and commercial banking activities (£4.3bn) concentrated almost 65 per cent of the bank’s revenues. This goes in line with the CEO’s strategy to grow the business through its traditional segments, and the bank has also managed to grow its UK Personal Banking activities by 6.8 per cent by the end of the year.
As for the company’s Balance Sheet, the bank appears to be well positioned to operate even during turbulent times such as the ones the global economy is going through right now. Its CET1 ratio currently sits at 16.2 per cent (nearly four times higher than the recommended 4.5 per cent), its Liquidity Coverage Ratio is at 152 per cent (exceeds average 30-day cash outflows), and the company’s Loan-to-deposits ratio also ended the year at 89 per cent (ideal: 80-90 per cent).
RBS Share Price Forecast
The most recent Royal Bank of Scotland share price prediction from analysts surveyed by Yahoo Finance seems to have given less weight to the diminished long-term returns announced by RBS’s CEO and have focused more on the bank’s strong financials and past positive performance.
In summary, analysts are setting their lowest target at £235 for the next 12 months, which would represent a 68 per cent positive return for those who decide to buy now, while they have also set their highest target at £350 which would result in a 150 per cent return during the next 12 months if those predictions do take place.
Meanwhile, the average target sits at £301.06, which is also more than twice the current value of RBS shares.
RBS shares: Buy or Sell?
The largest portion of the analysts surveyed by Yahoo Finance appears to conclude that this is a good moment to either hold or buy the stock, probably weighing in the company’s fundamental robustness.
In fact, two analysts are rating the stock as a strong buy which shows how the market could be overreacting to the CEO’s recent cut to the bank’s long-term return.
Furthermore, two elements seem to be driving RBS share price forecast, with one of them pushing the price down and the other lifting its short-term and mid-term forecasts.
1. Long-term Return on Tangible Equity (RoTE)
Before RBS’s current CEO Alison Rose took over, the company’s former CEO Ross McEwan set a target RoTE of 12 per cent over the next five years.
Now, Rose has modified this target to 9-11 per cent, which raises concern regarding the bank’s business model sustainability and its ability to generate more revenue over the long term. It is hard to explain why such a cut seems logical considering the bank’s most recent financial performance.
2. Strong fundamentals
Most analysts seem to be founding their RBS share price forecast on the bank’s fundamentals, including its attractive profit margins and sound liquidity ratios.
While the short-term reaction might have been unfavourable, these analysts seem to rely on the fact that markets could have over-reacted to the CEO’s outlook on the company’s long-term returns, while leaving aside its strong fundamentals.
With contracts for difference, it does not matter whether your view of the RBS share forecast is positive or negative. You can always try to profit from the future price fluctuations, regardless of their direction. Follow the latest market news and track the RBS stock live rates with Capital.com.