Is Royal Bank of Scotland (LSE: RBS) the best long-term share to buy in the FTSE 100? The banking sector has taken a dramatic fall due to the uncertainty Covid-19 places on the economy, resulting in March’s stock market crash. This allows us (as the opportunistic investors that we are) to potentially seek for unique openings for a high-risk but high-reward lucrative investment. Does RBS fit into this category?
Sector under pressure following stock market crash
On face value, the year-to-date performance of the stock has taken a dramatic tumble. The share price of RBS has fallen by around 50%. Similarly, during this time the FTSE 100 has also slashed down as far as 34% to 5,000.
RBS is also having to deal with low-interest rates. In the first quarter, overall revenues declined 1.6%. Revenues may continue to stagnate considering that the Bank of England maintained its key rate at the lowest level of 0.1%.
However, despite these pressures, RBS offers less risk than many other firms within its sector. The bank has relatively limited exposure to credit card lending, as RBS’s primary source of funding comes from customer deposits.
Margin of safety
Throughout the process of a decade, RBS has rebuilt a relatively strong balance sheet, with a reduction in debt from 2013 of £600bn to £260bn in 2020. Before the stock market crash, the bank was set to yield nearly a 10% annual dividend in 2020 and 2021. Although RBS may not be able to reach this level of yield for another year or two, it clearly shows the dividend potential and the balance sheet durability that the RBS holds.
In addition, when comparing Royal Bank of Scotland with other companies within its sector, RBS has become profitable for the past five years, growing earnings by 53.5% per year, exceeding the banking industry average of 27.5%.
Foolish final thought
Naturally, the bank’s share price may experience turbulent volatility in the short term. The economy consensus remains unsure of the longevity of the virus and the significant impact it will have on the UK economy.
One possible outcome is that it could be several years before optimism is regathered in the economy again (there could easily be another stock market crash). The 50% decline in the RBS share price highlights that investor sentiment is fragile.
As the economic fallout of the pandemic becomes clearer over time, this could persist in the short run, but the valuation of the RBS share price could provide long-term investors with the opportunity to buy a high-quality business while it offers a wide margin of safety.
The best way to limit the risk of this investment going wrong, while being able to partake in any potential upside, is to own the stock as part of a diversified portfolio of shares. With the possibility of the stock to reach its prices of before the pandemic of 230 GBX, the investment opportunity of this quality stock, with industry-beating earnings growth rate, could provide for a lucrative opportunity for a long-term investment.
