Royal Bank of Scotland (RBS), formerly a dominant United Kingdom bank, was undone by its global ambitions, in our opinion. RBS destroyed its narrow moat with its reckless acquisition of ABN Amro at the peak of the market bubble in 2007. Now under new leadership and majority government ownership, RBS is making progress on narrowing its vision, turning around its core businesses and shedding its legacy assets.
RBS still has a ways to go, however. It still holds well over £100 billion of noncore assets, many of which are very unattractive. Moreover, we're not fully convinced RBS will meet all of its targets in its core division over the long term. We think it will be hard for RBS to regularly exceed its target 15% return on equity unless trading income and net interest margins improve materially. In fact, we think returns are likely to be below 15% and well below pre-crisis levels.
Our cautious outlook for the bank is further dampened by the slow pace of economic recovery in the U.K. and the eurozone. Therefore, we are placing RBS under review.
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