Should I Buy Royal Bank of Scotland for My ISA?

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LONDON -- I do not think Royal Bank of Scotland Group  (LSE: RBS  ) (NYSE: RBS  )  has a place in the savvy investor's portfolio at the moment. The dragging effect of previous mis-selling scandals and ongoing restructuring plans, allied to the possible introduction of fresh legislation to hike capital reserve requirements, makes the bank a risky choice.

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Losses balloon as mis-selling issues roll on
RBS reported late last month that full-year losses shot to a mammoth 6 billion piounds in 2012, up from around 2 billion pounds in the previous year.

The bank said it had earmarked huge sums to cover future compensation claims for previous mis-selling practices. And some analysts predict that issues surrounding the improper sale of payment protection insurance (PPI) and interest rate hedging products could result in another 1 billion-pound bill for 2013. RBS has taken a 2.2 billion-pound hit for the mis-selling of PPI products to date.

Elsewhere, the bank's ongoing restructuring saw non-core assets fall to just 57 billion pounds last year, and the bank hopes to reduce this figure to 40 billion pounds by the end of 2013 as it bids to repair the bombed-out balance sheet.

However, further difficulties can be expected from these non-core divisions over the near term -- even though their operating losses reduced 32% last year -- while continued restructuring will accrue additional heavy costs.

A risky play despite projected earnings turnaround
City analysts forecast earnings per share (EPS) of 24 pence for 2013, swinging from the massive losses per share reported last year. EPS is then predicted to rise a further 37% in 2014, to 33 pence.

RBS currently trades on a P/E ratio of 12.7 and 9.3 for this year and next, which compares favorably with a forward earnings multiple of 13.6 for the wider banking sector. However, the bank carries a lower rating due to the multitude of issues that could bash earnings further down the line, and that are likely to extend well into the future.

As well, the bank's inability to currently offer dividends to investors dents its appeal as a stocks and shares ISA contender. Although the board has again stressed its desire to introduce shareholder payouts in the near future, investors should not hold their breath while major reparations to the bank's finances continue.

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Related Tickers

9/26/2016 4:01 PM
RBS $4.61 Down -0.14 -2.95%
Royal Bank of Scot… CAPS Rating: ***
RBS $178.44 Down -4.16 -2.28%
Royal Bank of Scot… CAPS Rating: No stars