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Will RBS’s share price see long-term gains?

RBS's [RBS] share price is up 5.64%% since the beginning of June (through 3 July’s close). Given that the stock is down circa 50% so far this year, last month’s modest uptick could be considered something of a revival.

While most of RBS’s share price gains came at the start of June and peaked shortly thereafter, any suggestion that the tide could be turning as the UK’s economy edges out of lockdown will be welcomed by investors.

This could be the time for traders to grab a bargain, especially since RBS’s share price has a low 5.57x price-to-earnings multiple, and is still some way off its 265p 52-week high. This is almost certainly a long-term target price, and getting back to that point would represent a healthy 117.5% upside.

For traders willing to wait, what are the longer-term headwinds facing the stock?

 

 

What's the long-term outlook for RBS's share price?


Coronavirus impact

Like any other UK bank dealing with the coronavirus, RBS is vulnerable to its loan book — both regarding business lending and mortgage defaults. According to the Financial Times, over 50% of the money lent to small businesses to help them through the outbreak may not be repaid. This could see RBS’s share price take a hit going forwards.

In the first quarter, RBS set aside an £802 million impairment charge to cover these kinds of losses. That's quite an increase from £86 million the year before. With news of increased job losses and the government's furlough scheme ending in October, RBS could find itself having to put aside more cash.

 

Housing market grinds to a halt

In May, the UK saw just 9,300 new mortgages approved as demand collapsed 90% compared to pre-pandemic levels, according to stats from the Bank of England. Even worse was news that June saw UK house prices dip year-on-year for the first time since 2012, according to Nationwide's influential survey. As one of the UK's biggest mortgage lenders, this is likely to severely impact a lucrative revenue stream for RBS. That said, this could well represent the lowest point, leaving lots of room for RBS's mortgage sales to begin to pick up — albeit very slowly. Any notable impact this might have on the bank — good or bad — will likely be reflected in RBS’s share price.

90%

Drop of demand for mortgages during the pandemic

  

Prospect of a no-deal Brexit

Throughout 2020, Brexit has weighed on the banking sector, and, while coronavirus concerns may have momentarily eclipsed it, the issue hasn’t gone away. At the start of June, Andrew Bailey, Governor of the Bank of England, warned banks that they should start accelerating preparations for a no-deal Brexit:

“As we have said previously, the possibility that negotiations between the UK and EU over a future trading relationship might not conclude in a deal is one of a number of outcomes that UK banks need to prepare for over the coming months.”

The UK government wants the EU to commit to providing access to the bloc’s financial markets — something Brussels has refused so far. Should the UK and EU fail to strike a trade deal by the end of the year, it could have consequences for the UK's financial markets and RBS's share price could suffer.

“As we have said previously, the possibility that negotiations between the UK and EU over a future trading relationship might not conclude in a deal is one of a number of outcomes that UK banks need to prepare for over the coming months” - Andrew Bailey, Governor of the Bank of England

 

Time to buy RBS?

Of the 22 analysts tracking RBS's share price on the Financial Times, 3 rate it a Buy and 10 Outperform. None rate it a Sell. Among the analysts offering price targets, RBS carries a 137.5p average target. Hitting this would see a 12.84% upside on the current share price (through 3 July’s close).

RBS's share price is trading at a 0.3 price to book ratio. That suggests the market is actually undervaluing RBS. It's also worth pointing out that before cutting its dividend, RBS was planning to reward shareholders with a 10% yield.

While net profit dropped to £288 million in the first quarter this year from £707 million the year before, it's worth remembering RBS had been on the up. Over the past three years, RBS has been increasing its earnings, since losing £5.20 billion in 2016. In 2019, earnings came in at £3.54 billion, up from the £2.16 billion seen the previous year.

Should a short, sharp recovery actually happen, RBS's share price could be a bargain as it stands through 3 July’s close.

 

Market Cap£14.987bn
PE ratio (TTM)5.49
EPS (TTM)22.50
Quarterly Revenue Growth (YoY)-20.00%

RBS share price vitals, Yahoo Finance, 7 July 2020

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