Royal Bank of Scotland shares have slipped back after a new sell note on the bank.
It is down 5.7p or nearly 1.5% at 383.3p after Ian Gordon at Investec moved his recommendation from hold to sell. Gordon said:
RBS shares have recouped substantially all their 2015 losses (up 7% in 2 weeks from 362p on 30 January) and once again trade at a small premium to 2014 and 2015 estimated total net asset value (388p/386p). This is notwithstanding our continuing expectation that it will deliver only a “break-even” performance in 2015 (we forecast earnings per share of 0.1p versus Bloomberg consensus of 4.9p). Even looking out to 2017, we see return on equity at just 6.2% (consensus 6.5%) which appears to offer inadequate support (irrespective of RBS’ 79% UK state ownership).
We note the good news that the Citizens Financial Group share price has recovered to more than $25. RBS currently retains 70.5% ownership after disposing of an initial 28.75% (including overallotment option) in the IPO at $21.50, and then a further slither by way of a share buyback by CFG at $23.36 on 8 October. The 180-day lock-up expires at the end of March, and we expect further reductions through the second to fourth quarter 2015 to trigger de-consolidation by around year-end 2015. This will, in our view, entirely “fix” RBS’ capital position.
Conversely, we regard market expectations around interest rate developments as singularly unhelpful for RBS. We believe that of the FTSE 100 UK domestic banks it is the most positively geared to rising UK interest rates, but the yield curve now implies no rate rise until the third quarter of 2016. With rising pressure on asset spreads, (particularly mortgages and personal loans), but much more limited incremental spread benefit from liabilities, any net interest margin expansion may be muted.
Although we anticipate no (net) loan impairment charge, we still forecast an Attributable Loss of £0.1bn in the fourth quarter of 2014 (consensus -£0.2bn), albeit timing issues relating to visibility/recognition of incremental conduct costs could yet prove to be a material swing factor. We note fresh calls by members of the Treasury Select Committee last week for the FCA to investigate allegations of low interest rate hedging products redress assessments by RBS relative to other banks’ standards.
