Royal Bank of Scotland Group (NYSE:RBS) is slowly recovering from the collapse in 2008 (£24bn loss for a then-largest bank in the world) followed by a governmental bailout.
It hasn’t reported profit in the last 7 years but the situation should improve in near term after non-core assets are divested and regulatory supervision is eased. Some serious risks (outlined below) are present and we believe that after Brexit RBS was oversold on Friday, June 24 th, 2016 and look like an attractive entry opportunity. However, to justify that attractiveness and to generate handsome capital gain, it might take years for RBS due to the weaknesses it possesses.
Government control ensures support for RBS (although it would be very negatively received by the public if happens). Her Majesty’s Treasury (HMT) still holds 72.6% of RBS’ equity and reducing this share can be difficult given currently depressed stock prices but HMT indicated that it would divest its share in RBS even at a loss (stock were purchased at 5.02p, almost twice the current price) and had already sold first portion in the beginning of 2016. RBS is expected to become privately-owned again by 2020. Under governmental “Capital Resolution” program RBS faces various restrictions i.e. it should decrease portion of its problem legacy businesses (26% of risk-weighted assets at end-FY2015) more than 2 times by the end of 2016.
Operating environment is negative for RBS. Although most of RBS’ business is concentrated in the UK (88% of income in FY2015 and RBS plans to increase focus in domestic activities raising its share to 90%) it could face significant problems after almost imminent UK economy slowdown following the Brexit. The UK gross-domestic product (GDP) growth was already slow at just +0.4% in 1Q16 (compared to +0.6% in 1Q15). Various studies forecast up to 8-10% decline in GDP after separation with the EU and financial services should be among industries most adversely affected – potential problem sources include legal restrictions to capital flow, limiting employment of EU citizens and as a result – shift of Europe’s financial center from London to Frankfurt or somewhere else in continental Europe and reduced market share for UK-based banks.