The predictions made in this magazine are just that. The value of your investments and the income derived from them may go down as well as up. You may not get back all the money that you invest. theplc.london | 19th March 2015
WHY INVEST? Even banks deserve a second chance
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n January 2007, Royal Bank of Scotland shares were 8,776.51p. In January 2009 they were 220p. In the last 2 years, the shares have gradually been increasing, with lots of ups and downs on the way. Today they are currently trading at 351p but just a few weeks ago they had jumped up to 418p. This kind of volatile share price behaviour is very characteristic of the new RBS, jumping suddenly to an all time high or low, either just before or just after an earnings report. The good thing about RBS shares is that because the government bought £46 billion worth of shares with tax payer’s money and announced it would sell it’s stake at the right time, you can bet your socks off that the government won’t let RBS fail. They want it to be a success story and not just that, it has to be. It is one of the main UK engines of the economy. Forget Canary Wharf, how many Natwest highstreet banks are there in the country? A lot! How many morgages do they sell? A lot! How much revenue do they make from overdrafts and late payments? A lot! And let’s not forget that Scotland, in the end, never became indepenent after all.
Now lets look at RBS’s stats. In 2013, according to Wikipedia, revenue was £19.787 billion and total assets were £1,027.9 billion. So even if they continued making a loss of ten’s of billion’s for another few years, their assets would still be worth far in excess of that. RBS is from another planet. Just compare it with ASOS.com Their revenue was £753.8 million in 2013 but because their overhead is so much higher, as they trade physical items not digital currency, their profits were relatively low at £29 million. And their assets, when compared to RBS, begs the question... What assets? And yet their shares are currently trading at 3,730p.
What does RBS do with all this cash? For starters, they multiply it by ten through the magic of fractional reserve banking and then invest it in government bonds, securities, etc. If RBS had been allowed to fail, everybody would have tried to withdraw their money from one of the world’s largest banks. Nobody wanted to bail out the banks but in reality, it was the only option.
The fact that RBS shares passed the 400p barrier, just a few weeks ago, is a good indication that it will pass the 400p again soon. Even though, almost 2 years ago their shares dropped to 295p, I still say they are a bargain at 350p.
The economy in 2015, according to George Osborne, seems to be making real progress, which is excellent news for British banks.
TSB would have been an excellent buy at 260p just a few days ago, as they are now trading at 326p, a sudden jump of around 20% but that is the nature of trading. If every trade you made was a winner, you would probably end up on The Sunday Times Rich List by the end of the year.