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Why the bruised RBS share price is a bargain at 120p

Royal Bank of Scotland (RBS) has been among the worst-performing banking stock in Europe in the past few years. RBS share price has declined by more than 56% in the past five years. In the same period, the iShares MSCI Europe Financials ETF has declined by more than 37.9%. Lloyds share price has declined by 52% while Barclays and HSBC share price have declined by less than 50%. The same trend is visible in the company’s performance in the past year as shown below.

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Why RBS share price has been in a freefall

This year alone, RBS share price has declined by almost 50% and the stock is trading at the lowest level since 2009.

In the past quarter, the company reported that its total income in the first quarter rose by 4.1% to $3.2 billion. But, as with all banks, the firm had to contend with bad debt provisions due to the coronavirus pandemic. The company allocated more than £802 million to these provisions. The aforementioned revenue growth was mostly due to a 21% increase in non-interest income.

The main contributor to RBS stock price decline is the fact that the company derives a substantial amount of income in interest income. It makes more money in income than its major peers like Barclays and Lloyds. Therefore, the recent rate cuts and talk of negative rates by the Bank of England will be difficult for the bank. Investors are also worried about rising costs as Alison Rose attempts to digitise the bank. While long-term investment is usually a good thing for a bank, it tends to have short term shocks that hurt profitability.

RBS is in a better financial position

Fortunately, unlike other banks, RBS is in a better capital position, which means that it will emerge from the crisis a better brand. The best approach to view the capital position of a bank is to look at the Tier 1 capital ratio. According to the bank, its CET1 ratio is above 16%. This is significantly better than that of Barclays, Lloyds, Deutsche Bank, and Credit Suisse. Among these, Credit Suisse has the worst at about 12.5.

The CET ratio is so good that the bank is considering to lower it to about 14%. It will achieve this by buying back its shares and issuing dividends. But the BOE has cautioned banks against doing this.

The case of RBS share price is also supported by its valuation. As shown below, the company is trading at a price to book ratio of about 0.29x. This is in the middle of its closest peers like Barclays and Deutsche Bank. This is despite being in a better financial position.

RBS stock price technical analysis

RBS share price is trading at 119.65p. On the daily chart, the price is along the 50-day exponential moving average and slightly below the 100-day EMA. Also, it has formed an island reversal pattern. In the short term, the outlook for RBS stock price is neutral. Still, the key levels to watch are the 100-day EMA at 140p and 111.45p, which is the lowest it has been since June 15.

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