The 2013 Outlook for Royal Bank of Scotland


LONDON -- In this festive mini-series, we look at the 2013 prospects for some of your favorite FTSE 100 (UKX) shares. Today, it's the turn of Royal Bank of Scotland Group .

RBS' shares have gained 50% during the course of 2012 compared with a 6% rise for the Footsie. RBS's gain isn't as impressive as Lloyds' +81%, but it's a tasty increase all the same.

Like Lloyds, RBS has been working hard to make itself safer and stronger. The company described progress on its restructuring programme as "excellent" in a Q3 statement released in November, which suggests the big rise in the share price this year is not without justification.

Notable events in recent months include the successful flotation of Direct Line Insurance Group, which raised 911 million pounds, and RBS' exit from the Government's Asset Protection Scheme, demonstrating the group's progress in building a more robust and stable balance sheet.

Less welcome news was Santander U.K.'s decision to pull out of an agreed purchase of 316 RBS branches, the sale of which is required by the European Commission. However, RBS is commencing a new process for the disposal, and shareholders can expect to hear more about this in 2013. Scheduled news releases for the year kick off with annual results in February.

RBS has clearly made good progress on its strategy of reducing its non-core assets and de-risking its balance sheet during 2012. But, after the 50% rise in the share price, how does the stock valuation look now, and have the shares got further to go in 2013?

At a recent share price of 302 pence, RBS's 12-month forward price-to-earnings (P/E) ratio of just over 10 represents no cheaper an earnings rating than more solid banking citizens HSBC and Standard Chartered.

However, as with Lloyds, RBS looks a lot better on an assets-valuation basis relative to HSBC and Standard Chartered, which are both trading at a premium to tangible net asset value (TNAV). In fact, RBS also looks better relative to Lloyds on this basis.

RBS started 2012 on a 60% discount to TNAV, while Lloyds began the year on a 56% discount. Because RBS' shares haven't soared as spectacularly as Lloyds', RBS is currently on a discount to TNAV of 37%, compared with Lloyds' now much narrower discount of 17%.

These numbers would suggest there's more scope for RBS's discount to close further than Lloyds' in 2013 -- by way of its share price rising higher if conditions in the financial markets remain reasonably benign.

However, conditions may not remain reasonably benign, and if you have your doubts about the macro-climate, you're in good company. City super-investor Neil Woodford, who famously got out of financials before the credit crunch, is still steering clear of banks. Woodford's funds have trounced the market over the past 15 years, so his views and approach to investing are certainly worth considering.

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G. A. Chester does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares in Standard Chartered. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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