Why I Am Still Bullish on Royal Bank of Scotland Group


LONDON -- Royal Bank of Scotland is the fifth-best performing FTSE 100 share so far this year.

Bailed-out bank RBS has rewarded investors that stuck with it during the eurozone crisis. In six months, the shares are up 77%. So far in 2013, they have risen 11%. You might look at the share price graph and think you have missed the big gains. I think that further upside is to come and continue to hold my shares.

Why the big rise?
A large-cap bank like RBS cannot post such huge rises just from ordinary people buying the shares. RBS' rise will be down to large, professional fund managers backing the bank's recovery.

Fund managers are buying now because they believe that RBS is much safer than they did before. When the investment community's perception of risk in a company falls, its shares will often put in big increases.

Sentiment toward RBS remains poor. The average broker recommendation on the stock is just a hold. There is plenty of room for sentiment to improve and for more buyers to rush in.

10%, 30%, 40% ... 50% upside?
Before the eurozone crisis came to the fore in 2011, shares in RBS were trading over 400 pence. That's more than 10% ahead of today's share price.

A more ambitious price target for the shares would be a return to the level equal to the bank's net asset value. At the end of September, this was 476 pence. RBS shares would need to rise 30% to trade on a par with the bank's assets.

RBS is forecast to report a profit for 2012. This means (roughly) that the bank's asset value must be increasing. RBS is forecast to report earnings per share (EPS) of 17.3 pence for 2012. At the beginning of 2012, RBS had 501 pence of assets per share. Add in 17.3 pence of earnings gives me a price target for the shares of 518.4 pence -- more than 40% ahead of the share price today.

If that is not enough for you, RBS is forecast to report 27.7 pence of EPS for this year. Adding earnings for 2012 and 2013 to the end-2011 asset value gives a target of 546 pence -- almost 50% higher than today.

As RBS recovers, its shareholders have been making massive gains. Successfully calling a share's recovery can help you beat the market. For more information on how you could make big gains from shares then get the free Motley Fool report "10 Steps to Making a Million in the Market." This publication is completely free and will be delivered to your inbox immediately. Just click here to start reading today.

The article Why I Am Still Bullish on Royal Bank of Scotland Group originally appeared on Fool.com.

David owns shares in Royal Bank of Scotland. 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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