LONDON -- Shares in majority-nationalised Royal Bank of Scotland Group (NWG 6.00%) (NWG 1.79%) have come under renewed pressure in recent weeks, trudging 24% lower from January's one-and-a-half-year peak around 368p.
And I believe shares are likely to post further losses moving forwards. Although the company is expected to nudge back into earnings growth over the medium term following a disastrous 2012, the stock remains highly risky as recent issues continue to overhang the bank, compounding the firm's already-stratospheric price rating.
Cost of previous sins keep on rolling
Appetite for the bank was whacked again last month when the Financial Policy Committee announced a 25 billion-pound capital shortfall in the British banking sector, funds that the government wants in place to cover the fallout from recent mis-selling scandals related to payment protection insurance (PPI), bad loans and other risks. Royal Bank of Scotland has already had to swallow 2.2 billion pounds worth of losses due to mis-selling practices.
And earlier this month fresh legal action was launched by around 100 of the bank's institutional investors, collectively known as the RBoS Shareholders Action Group, against the firm's former directors. The group is seeking up to £4bn in compensation, claiming that directors "sought to mislead shareholders by misrepresenting the underlying strength of the bank and omitting critical information" relating to the 2008 rights issue.
Royal Bank of Scotland clocked up full-year losses of £6bn last year, trebling from those recorded in 2011. And the outlook for turnover, profits and returns remains unappealing at best. Indeed, Investec said that it expects the cost of equity to remain above the return on equity until the end of 2017 at the earliest.
Earnings projections fail to justify current stock prices
The broker expects earnings per share of 8 pence in 2013, snapping back from colossal losses per share of 54.3 pence last year. The broker then expects this to rocket more than 160% in 2014 to 21 pence. Still, the bank currently trades on a P/E rating of 35.2 and 13.4 for this year and next, which represents a heavy premium to a forward earnings multiple of 12.4 for the broader banking sector.
In my opinion, the prospect of further heavy costs -- allied to a patchy earnings outlook and uncertainty over when the government will relinquish its stake in the bank -- makes Royal Bank of Scotland an overly risky proposition. As well, the company is not expected to hand out dividends to shareholders for some years to come, further undermining the investment case.
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