Politics Aside for This Bank, if That's Possible

09/06/2013 12:00 pm EST


Politicians and bandwagons seem to go hand in hand with red tape, however, despite all the obstructions, Peter Stephens, of The Motley Fool UK still has high hopes for this bank.

It always fascinates me how politicians seem to jump on bandwagons. Indeed, the Parliamentary Commission on Banking Standards recently commented that it is "important for all the options for Royal Bank of Scotland's (LN:RBS) (US:RBS) future structure to be examined as a matter of urgency."

This seems to indicate that the Commission is seeking a break-up of RBS between a good RBS and a bad RBS so as to create two different entities. This idea is backed by a whole host of MPs, former Bank of England Governor, Lord King, and former Chancellor, Lord Lawson. Indeed, it seems to be a bandwagon worth jumping on, so it would be of little surprise to see other MPs follow suit and tie their respective flags to this particular mast.

Of course, the debate surrounding whether RBS should be split up or not is, for me, something of a red herring. This is because the Royal Bank of Scotland is already well into the process of splitting itself into a good and a bad bank; however, it is just not labeling itself as such.

The two areas are, according to RBS, core and non-core, with the core part of the bank representing the bits it wants to keep as part of what it hopes will be a thriving RBS. The non-core assets, meanwhile, are those that it either wants to sell because they require too much capital for too little return, or else it is being forced to sell them (as in the case of the sale of English branches).

So, the debate in Westminster Village is, in my view, rather disingenuous to Stephen Hester, RBS's current CEO, because he has worked hard to create a good bank and dispose of the bits that arguably made RBS a bad bank.

This strategy is starting to show signs of real progress, with RBS forecast to record earnings per share of around 30p in 2014. This puts shares on a forward price-to-earnings (P/E) ratio of just ten, which compares very favorably to the FTSE 100 on 14.8 and to the wider banking sector on 16.1.

Furthermore, although only a small proportion of such earnings are forecast to be paid out as dividends, I believe this is a prudent position for the bank to adopt. Using the capital to further shore up the balance sheet seems to be more sensible than returning cash to shareholders, at least until RBS becomes a really good bank.

Peter owns shares in RBS.

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