Why I am Buying RBS

One advantage of the ‘Credit Crunch’ or the ‘Banking Crisis’ is that many banks are seriously out of favour with investors, both institutional and individual. RBS has been one of the heaviest hit thanks to media hysteria and clumsy government intervention. RBS was also the victim of very aggressive shorting by hedge funds and others who seemed determined to ensure the whole company was nationalised. They nearly got their way.

Having the UK Government as your major shareholder puts a lot of investors off, and they have good reason to be put off. Government policy is not always compatible with capitalism! However, with an election coming up and a huge budget deficit, it is not in the interest of the UK Government to hold its stake for any longer than absolutely necessary. They want to make a profit as well!

The current share price of RBS is around 33pence per share. This gives it a market capitalisation of £18.8billion. Here is my logic for saying that this is a BIG discount to real value and why I am buying:

1/ At the end of 2008, RBS announced record losses. A large part of these losses were actually goodwill write-offs, so as of now the brand names of RBS, NatWest, Coutts, etc. have zero value on the books.
2/ The Net Asset Value per share is about 59p .. nearly double the current share price
3/ The governments average buy-in price is also around 60p
4/ Once the cycle of write-downs and impairment losses comes to an end (maybe 12-18 months from now) RBS should easily generate £5-6billion in profits per year – as proven by its track record
5/ RBS Insurance will be sold and has been previously valued at around £7billion, RBS Global Transaction Services will be sold for circa £2billion.

So if you’re not comfortable buying at half the net asset value, or half the price the UK Government is exposed to and wants to make a profit from, think about it another way. Taking out RBS Insurance & Global Transaction Services, you will be buying Coutts, NatWest, RBS, Citizen, Ulster Bank and more for just £9-10billion. These franchises could pay you back in dividends in just 2-3 years once the impairment cycle is finished.

That is what is so illogical about the RBS share price today. The company is not even being priced at break-up value! RBS is now one of the safest banks in the World, having most of its ‘bad’ assets insured by the UK Government. As the economy and property markets in the UK and US improve, it would seem highly unlikely that RBS would ever have to call on this insurance anyway.

In one or two years, RBS will be smaller and more efficient. It may not make the £8billion per year it used to in profits, but it will be highly profitable and will begin to grow again. 33pence per share is a steal and if the UK Government are happy with 60pence, I wouldn’t bet against them.

I will continue to buy RBS shares sub 45pence and expect a £1 per share price within 2 years.