Why Shares In Royal Bank Of Scotland Group Plc Should Be 450p
As a result of the financial crisis, thousands of private investors lost thousands of pounds on their shares in RBS. However, by my calculations, the shares today offer their best ever opportunity for a low-risk, big profit.
At today's price, I see little possibility of Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) shares falling significantly. Better still, the facts suggest that a large rise is justified.
Back in black
For the first three months of 2013, RBS made a pre-tax profit of £826m. That's well ahead of the losses that were being reported last year. After accounting for one-offs, group operating profit was 50% higher than in the same period last year.
One of the biggest contributions to the increase in profits at RBS was the reduction in losses. Impairments (losses on loans or assets) of £1bn were down 20% versus the same period last year. The fall in impairments versus the previous quarter of trading was 29%.
Liquidity and security
As panic lifts, RBS is proving itself to be an increasingly secure organisation. The company's Tier 1 ratio (a measure of a bank's capital versus its risks) improved by half of one percent to 8.2% at the end of March. RBS also reported that customer deposits now exceed amounts loaned out.
In Q1, the bank's tangible net asset value per share increased by 3%, to reach 459p. A discount to asset value might be justifiable if RBS was loss making, or if there was a realistic possibility of big losses in the future. However, RBS is forecast to make a profit this year and grow profits further in 2014. As the asset value is increasing, the shares will have to rise even further to catch up.
RBS can inspire further confidence in its long-term security by selling assets. RBS is yet to dispose of its remaining stake in Direct Line Group, or the 300+ branches that it has earmarked for sale. Analysts are also suggesting that RBS could dispose of a portion of its US operation, Citizens Bank, via IPO.
RBS is strong, profitable and trading at a huge discount to its net tangible asset value. Today's share price of 294p is miles wide of the bank's true value.
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