Please ensure Javascript is enabled for purposes of website accessibility

It's Time to Buy Royal Bank of Scotland

By Roland Head - Apr 5, 2013 at 3:38PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Royal Bank of Scotland Group is offering value investors a rare opportunity.

LONDON -- Royal Bank of Scotland Group (NWG -0.05%) (NWG -0.18%) is back in the headlines again, thanks to a new round of lawsuits from investors. They feel that the bank misled them when they participated in a 12 billion pounds rights issue in 2008, only to see the value of their shares plummet a few months later, when the bank was bailed out.

RBS's share price is down by 25% from its January peak of 367 pence. As I write, you can pick up RBS shares for less than 280 pence -- and I reckon that's a good deal.

Forget the lawsuits
The latest lawsuit to hit RBS comes from the RBoS Shareholders Action Group, which says that RBS may have to pay them 4 billion pounds in compensation for their losses.

Maybe. But I suspect it won't, and claims like this usually rumble on for years before reaching any conclusion. Whatever the outcome, I don't believe it will affect Royal Bank of Scotland's recovery prospects.

6 billion-pound capital shortfall?
Last week, a Bank of England report into U.K. banks found that they had a collective capital shortfall of 25 billion pounds. The BoE didn't release a breakdown, but most analysts believe that RBS is worst affected, and may have a shortfall of 6 billion pounds.

Although this does need addressing, it isn't urgent and will probably be dealt with by retaining profits and postponing dividend payments a little longer. Discussing the report, BoE Governor Sir Mervyn King, said that the problem was "perfectly manageable" and "is not an immediate threat".

Pay 63 pence for 1 pound
The shares of a healthy bank would normally trade at or slightly above its book value. But at 280 pence, RBS shares are currently trading at just 0.63 times the bank's tangible book value, which I think is a great opportunity for value investors.

The main risk is these assets may fall in value, or that RBS will sell some of them to raise cash. So what can we expect?

Last year, the bank's net tangible asset value per share dropped from 501 pence to 446 pence, as it scaled back some of its operations and disposed of non-core assets. RBS expects 2013 to be the final year of restructuring so, assuming a similar performance to last year, RBS may be left with 400 pence of tangible assets per share.

At a share price of 280 pence, this still gives a potential upside of nearly 25% for new investors.

A safer alternative?
If you want to diversify away from the U.K.'s bailed-out financial sector, then I have another suggestion.

This company outperformed the FTSE 100 by 32% in 2012, and has delivered 44% earnings-per-share growth since 2009. It's already ahead of the wider market in 2013, too.

The Fool's analysts believe this company's shares could be seriously undervalued, and have put all the details in a new free report. To find out more, click here to download your free copy now -- but hurry, it will only be available for a limited time.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

NatWest Group Stock Quote
NatWest Group
NWG
$5.44 (-0.18%) $0.01
NatWest Group Stock Quote
NatWest Group
NWG
$218.20 (-0.05%) $0.10

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.