Our view: Avoid
Share price: 23p (+1.21p)
Are Royal Bank of Scotland's shares as toxic as its brand? Yesterday's decision to jettison a good chunk of its investment bank looks like a good move. The problem faced by RBS is that even though the division – called Global Banking & Markets (GBM) – has done well for it over the past few years, delivering more than £10bn in profits, it is still second tier.
The M&A advice, broking and equities businesses that are being dumped might have had pretensions of competing with the likes of Goldman Sachs and Morgan Stanley. They were never going to do so. That is not least because even being on the same playing field requires that you pay a fortune to your star bankers and hope they bring the deals that will allow you to make a return.
Goldman Sachs et al are having to cut back on pay (a bit). If institutional shareholders did their jobs properly they ought to have been questioning whether such packages werereally worth it long ago. But even a constrained Goldman, or a Morgan Stanley or even a Barclays, can pay much more than RBS can because RBS is a state-controlled entity. Such packages are political poison.
What is more, the environment for these businesses is getting tougher, and regulation makes holding on to them more expensive. So they were going to struggle to meet their costs of equity in the future, and anyway, provide less than 20 per cent of the GBM's fees.
What RBS is holding on to are its bond business, fixed income, currencies and wholesale lending operation. They make good money at the moment and offer better prospects in future, although they are unlikely to save Mr Hester's blushes at results presentations thanks to harsher regulation and difficult markets.
Which leaves RBS shareholders reliant on the re-shaped retailand commercial operations to take up the strain.
The outlook here is worryingly opaque. UK growth will probably be torpid at best over the next few years, while Ireland (where RBS is also big) continues to face huge questions over its debts. The eurozone crisis casts a shadow over every bank.
Then there is the bank's status as a political hot potato – it is far more subject to interference than its fellow state-supported bank, Lloyds.
For a start, the state's holding is more than twice as big. The brand is also more toxic. The RBS name remains synonymous with Sir Fred Goodwin and the catastrophic mistakes made during his misrule.
If Mr Hester could, he might like to consider changing it, but that would stir up a hornets' nest north of the border. Therein lies the problem: everywhere one looks at RBS politics interferes.
UK Financial Investments is supposed to oversee the taxpayer's holdings in the banks and keep Number 11 Downing Street at arm's length. There aren't many who believe it does that.
Concerns over RBS's status as a political hot potato combined with an uncertain outlook are what lie behind the precipitous fall in the shares over the past 12 months. They are now worth just under half the estimated "book" value of the businesses that remain. That might look cheap but, as Nic Clarke, banks analyst at Charles Stanley, points out, there were some people saying buy Northern Rock when it was trading at that sort of valuation with queues of people outside its branches.
To be fair, today's RBS is not in that bad a state. If the UK economy does even a bit better than expected, the shares could easily gain 20-30 per cent in relatively short order. But so could Lloyds Banking Group. Both banks are risky propositions, but even with the uncertainty surrounding its chief executive, Lloyds looks less prone to interference, has better brands and yet offers a similar upside. It is the better bet right now.