Berenberg says "meaningful" capital returns at RBS possible in 2018

Investors are underappreciating faster-than-expected progress on cost cuts at RBS and the tentative headway it has made on a settlement with the US Department of Justice, analyst Peter Richardson at Berenberg said.

Combined, those two factors made them more confident that the lender would be able to dstribute roughly 35p a share of excess capital starting from 2018.

In parallel, RBS was continuing to grow its core business, yet with the shares trading on only 10.2 times their estimate for 2018 earnings per share of roughly 28p for the core bank, the excess capital remained "undervalued", he said.

Management had already carried out £708m of the planned £750m in cost savings it was targeting for all of 2017, he also pointed out.

Despite that track record, consensus was "failing to capture" the £1.25bn of cost cuts targeted for between 2017 and 2020.

If Berenberg's estimates panned out, the consensus forecast for pre-tax profits at RBS could rise by over 5%, Richardson surmised.

Scared of management guidance for a fall in net interest margins of 10 basis points to 202 in the last quarter of 2017?

Don't be, the analyst said, explaining that in his view that was just the mechanistic result of the lender's focus on risk.

"In our view, this is a price worth paying for more stable earnings as credit losses begin to normalise – an adjustment
that will be more pronounced for banks that have prioritised consumer lending growth."

The cost of a settlement with the US Department of Justice on the other hand was a risk, albeit manageable, he judged, estimating a headline value for the settlement of £9.0bn.

"RBS management has indicated that low-level settlement discussions have begun. This reinforces our belief that meaningful capital returns are possible during 2018."

Richardson bumped up his target price from 275p to 300p and reiterated a recommendation to 'buy' the shares, as he lifted his estimates for earnings per share in 2018 and 2019 by 6.6% and 5.1%, to 19.4p and 24.2, respectively.