More than a decade on from the financial crisis and Royal Bank of Scotland may finally be a worthwhile investment proposition again.
RBS was rescued by the Government in 2008 after the collapse of US investment bank Lehman Brothers created a wave of turmoil which brought other institutions to the brink.
Earlier that year, RBS had reported its first loss in 40 years as toxic mortgages and a number of acquisitions started to go badly wrong.
Slump: In March 2007 shares were as much as £59 each – they closed yesterday at 289.9p
The bailout was to the tune of £45billion, and today the Government still holds some 70 per cent of the shares in issue, worth around £20billion.
But while other banks have re-privatised in the years since the crisis, the road to recovery for RBS has been slower. Finally, though, experts say it has overcome all of its major obstacles.
Last week the bank agreed to pay a £3.6billion fine to the US Department of Justice for its part in the financial crisis. It follows a settlement with the US Federal Housing Finance Agency last summer over alleged mis-selling of mortgage-backed bonds.
While a £3.6billion fine might sound a lot, it’s a drop in the ocean compared to the losses the bank has suffered over the past ten years.
Restructuring costs, sold businesses, staff cuts, fines, legal costs and write-offs of loans that will never be repaid have totalled more than £50billion.
The other cloud hanging over RBS was the failed sale of 300 Williams & Glyn branches to satisfy competition rules.
RBS instead agreed to put money into an innovation fund to help boost the development of competitors.
So with all of that out of the way, should investors be looking to snap up its shares?
In March 2007 those shares were as much as £59 each – they closed yesterday at 289.9p. It is a heavy blow for anyone who invested in RBS at its peak.
Steve Davies has held shares in RBS in the Jupiter UK Growth fund for a number of years. The fund, which has returned 4.3 per cent over the past year, also has stakes in Lloyds, Barclays and Virgin Money. Of the four, RBS is his smallest stake but he says: ‘Now I can certainly consider buying more.’
Davies says it has been a difficult stock to hold but added : ‘The new RBS is going to make decent returns and is well-placed to benefit if interest rates keep rising.’
What RBS has going for it is that it still has a large branch network, billions of pounds of mortgages, huge numbers of current accounts and a large credit card business. That gives it the foundation to grow.
One of the most important questions investors want answered is whether RBS is going to reinstate a dividend.
Russ Mould, investment director at AJ Bell, says that will largely depend on whether it can avoid any more settlements or compensation pay-outs – don’t forget, UK consumers still have more than a year until the PPI deadline.
The Chancellor has a target to sell £3billion worth of shares by the end of this tax year and, if RBS can prove it’s a well-run bank, they could be heavily in demand.
An interest rate rise in the coming months would only increase that – with a large part of its revenues coming from UK consumers, the bank is well-placed to benefit from any hikes.
However, because it also has investment banking operations, RBS is still a riskier proposition than rival Lloyds.
Laith Khalaf, senior analyst at Hargreaves Lansdown, says: ‘RBS is slowly making progress but should only be considered by investors who are willing to take on the risks of a business which hasn’t yet fully recovered from the financial crisis.’