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Is the RBS share price a FTSE 100 bargain or a value trap?

Alan Oscroft
Stack of new bank notes

As a Lloyds Banking Group shareholder, I keep an eye on where all of our banking shares are going, especially Royal Bank of Scotland (LSE: RBS) which was also bailed out by taxpayers.

RBS has been a few years behind Lloyds, but it’s coming good on all the right liquidity measures. Now that dividends are back, and predicted to rise nicely over the next couple of years, it looks good to me.

It comes as a surprise, then, that since a recent banking share high point in March, RBS shares have fallen by 19.5%. Admittedly, Lloyds and Barclays (LSE: BARC) shares are also down, by 11% (against the FTSE 100‘s 1.5% gain over the same period), buy why is RBS apparently falling out of favour so badly?

Discount

Speaking of the balance sheet, RBS shares are trading on a significant discount to net asset value per share, and to me that adds another measure of undervaluation.

Forecasts for the UK’s banks are modest right now, and we could see them take a turn for the worse should the UK crash out of the European Union without a deal — and with Boris Johnson looking the firm favourite to take over as PM, that potentially disastrous outcome is being tipped by many now as the most likely.

Politics surely lies at least partly behind the low valuation of RBS shares too, as I don’t think many people will be expecting the Tories to win the next election (whether Boris is or isn’t the party’s leader). And what Jeremy Corbyn might try to do to RBS with his love of nationalisation is anybody’s guess.

Barclays

Whatever the reason for RBS’s price slump, politics surely can’t be behind Barclays’ fall, can it? Despite a better 2019 so far, the shares are the poorest performer of the three over 12 months, with a drop of 20%. In the same period, RBS shares are down 18% and Lloyds only 5%.

In fact, Barclays shares have been on a steady slide for the past two years, even though the bank has got back to EPS growth and to decent and rising dividends once again.

Barclays has suffered its fair share of financial penalties for various wrongdoings, but those are receding and I really don’t expect to see any other big problems along those lines coming out of the woodwork in the coming few years.

Suffering

So why has the share price suffered so badly compared to Lloyds? Part of it is surely down to the bank’s insistence on maintaining its investment banking division, which is volatile at the best of times and not doing that well in these troubled economic days.

On the other hand, Brexit is going to hurt too, and with a far greater UK retail banking presence than in past years, Barclays will surely shoulder some of the pain.

Right now, I suspect part of the reluctance of the market to back Barclays is uncertainty surrounding what kind of bank it wants to be and what it will look like in another 10 years.

Saying that, I still see the shares as cheap and a good long-term dividend source — providing you can handle whatever share price volatility the next decade might bring.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019