Japan Exposure Won’t Shake RBS

March 24th, 2011 by Trefis Team
RBS: Royal Bank of Scotland Group logo
RBS
Royal Bank of Scotland Group

The Royal Bank of Scotland (RBS) Group (NYSE:RBS) has been recognized as having a high exposure to the Japanese market. Among all its competitors, UBS (NYSE:UBS) reportedly remains most exposed to Japan, with other worldwide banking institutions and financial services groups like Citigroup (NYSE:C), Barclays (NYSE:BCS), Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM) facing a lower level of risk due to smaller exposures.

RBS’ exposure to Japan was reported as GBP 22.49 billion ($36.5 billion) in 2010, with most of this investment being in Japanese government debt. [1] Japan’s economic situation remains uncertain after the country witnessed one of its biggest earthquakes as well as a devastating tsunami and threat of a nuclear catastrophe at the Fukushima Daiichi nuclear-power complex.

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Our price estimate for RBS stock stands at $13.43, in line with market price.

Financial Institutions Diversify Geographically to Reduce Risk

All global financial institutions diversify their investment assets geographically. Ideally, if the economy of a country is seen to be stable and mature, then investments in the country are secure (although they might provide a lower return). On the other hand, investments in developing countries provide higher returns in relation to the added risk that investors must take.

Japan is the 3rd largest economy in the world, after the U.S. and China, and is considered to be one of the most mature global markets – a trait typically associated with low risk. But the recent struggle to revive a stagnating economy has made most financial institutions look for better investment options. [2]

Should RBS Really be Worried?

We don’t think RBS should be too concerned about its $36.5 billion exposure to Japan. While the total could be affected if RBS decides to unwind its position in these investments, the fact that RBS had an asset portfolio of $189 billion in 2010 suggests that the impact of this scenario would be limited.

To illustrate this effect, we can look to expected sales and trading assets. If we reduce our projection for this total to match 2010’s year-end total, it would imply a 1% downside to our $13.43 price estimate for RBS.

See our full analysis and $13.43 price estimate for RBS

Notes:
  1. RBS UBS Pegged As European Banks With High Japan Exposure, The Wall Street Journal, March 18 2011 [↩]
  2. Japan’s Economic Stagnation is creating a Nation of Lost Youths, DailyFinance, Aug 6 2010 [↩]