Trying to work out what's going on at RBS is not easy.
People ask "will taxpayers get their money back?" Well, given that the government paid 51p a share on our behalf, there's still a lot to do.
With the price at around 28p a share right now, then clearly, if you believe management can actually turn this around for us taxpayers, then the shares are a buy.
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But just what are the chances of that happening?
The bank's operations have been split into core (good stuff) and non-core (stuff it wants to get rid of). The core business (retail banking, investment banking, insurance, wealth management) is doing OK, but operating profits (that is, before various exceptional items and tax) fell last year from £7.4bn to £6.1bn.
The non-core business meanwhile, lost £4.2bn. Throw in losses on those aforementioned 'exceptional' items, such as Greek debt and payment protection fines, and overall the bank lost nearly £2bn up from a loss of £1.7bn in 2010. Nothing to cheer about here.
There are some encouraging signs for investors. The UK retail and commercial banking business (bread-and-butter banking) looks in reasonable shape. Another good sign is that the loans made by the core business are now financed by deposits and are not reliant on outside finance (known as wholesale funding).
But there's still a lot to worry about.
The value destruction isn't over yet
A big concern is RBS's ownership of Ulsterbank. The dire state of the Irish economy saw Ulsterbank take a £3.7bn hit from bad loans in 2011. And it could get a lot worse going forward.
Ulsterbank still has £48bn of loans outstanding. £20bn of these are mortgage assets and this is where it becomes quite frightening: £12.5bn of these mortgages are based on loan-to-value (LTV) multiples of 90% or more. £6.5bn have LTVs of greater than 130%. So the chances of further losses here looks high.
RBS, like other banks, will have to hold more capital going forward. Combine this with the weakness of the economy and its ability to make high returns on equity is limited.
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Management has admitted as much. It has cut its long-term ROE target from 15% to 12% - and this may still be too ambitious.
Let me explain. RBS's tangible net asset value (NAV) per share is 50.1p (down from 51p). Tangible equity is around £54bn.
For RBS to be worth its asset value, it has to make acceptable returns for shareholders. RBS said in its presentation to analysts that this means all divisions earning ROEs greater than 12%.
This would imply net income of £6.5bn, and RBS is nowhere near that (as noted above, it made a loss of £2bn last year).
And in fact, there is a good chance that NAV will continue to fall. RBS still has £94bn of non-core assets it wants to get rid of. The chances are, it'll have to sell some of these assets for less than their current book value. That would drive its NAV down further.
According to RBS's annual report, there are 108.2 billion shares in issue (including B shares). This means for every £1bn of loss, there is a loss in value of just under 1p.
So the question for RBS investors is - can the good bank's profits offset the bad bank's losses? From where we're sitting, that doesn't look very likely.
Do you really know what you are buying?
The problem with banks is that their balance sheets are very complicated. It is virtually impossible for an outsider to work out what a bank owns and what it owes. But what is clear is that RBS's balance sheet is a positive minefield. Throw in lots of leverage, and it makes for a risky punt.
In a growing economy, you might just might - do well. But in a weak, deleveraging economy it's a risk to avoid, especially with the mess that RBS still has to clean up. If you're a British taxpayer, you're already exposed to this bank don't increase your exposure by buying the shares as well.
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