Despite shares in RBS (LSE: RBS) (NYSE: RBS.US) being down 5% already in 2014, it could be worse. Indeed, the events at The Co-Operative bank show that, while RBS has some way to go before it can be considered a very healthy bank, it is on the right path and is taking the right steps to regain its status as a financially sound business.
In the meantime, RBS is benefiting from The Co-Op’s struggles, as well as the lack of competition in the UK banking sector. Here’s why that could be great news in the long run for RBS.
A Lack Of Competition
Despite there being new entrants to the UK banking sector in recent years, the same old faces still appear to dominate. One of those is RBS and, although new entrants such as Metro Bank and Virgin Money have provided some competition, they arguably haven’t made the impact that many had hoped. This lack of competition could mean higher profit margins for incumbents such as RBS, as reduced competitive pressure to cut mortgage rates and increase savings rates should benefit the bank’s bottom line.
Indeed, improvements in the bank’s bottom line are set to be seen in 2014, with RBS forecast to move from loss to profit this year. In addition, the size of the bank’s balance sheet has shrunk by 60% in the last five years, as it has sought to de-risk and improve efficiencies. This puts it in much stronger shape for the medium to long term and, it could be argued, this process has been made simpler and easier by there being a lack of competition. For instance, were RBS under more severe pressure to cut mortgage rates and increase savings rates, it may have taken longer to turn the bottom line around.
Looking Ahead
The lack of competition could also be aiding growth prospects for RBS. For example, it is expected to increase earnings per share (EPS) by 12% in 2015, which is around twice that of the FTSE 100. This shows that, while a lack of new entrants and competition has helped to get the bank back on its feet in recent years, they could now help RBS to deliver the level of profits that its balance sheet merits. As such, it could prove to be a strong performer going forward.
