Berenberg upgrades RBS to 'hold'

Berenberg upgraded Royal Bank of Scotland to ‘hold’ from ‘sell’, keeping the target price at 250p.

It said RBS has a strong core business, a solid capital position and a management team focused on cost-cutting and managing returns. “However, like a Russian doll, RBS’s core value remains trapped in a larger, more challenged group.”

Berenberg reckons the bank’s core value may soon begin to emerge as non-core falls from 25% to 15% of risk-weighted assets by 2017.

“While losses from non-core, conduct and payment of the dividend access share are likely to erode tangible book value further during 2016, we now think this is reflected adequately in the 30% discount to our 2016E TBV.”

Berenberg said RBS’ history of deleveraging and its focus on corporate banking makes it less exposed than peers to more acute competitive pressure in UK retail lending.

In addition, it pointed out that while costs in the corporate and investment bank, Ulster and private banking are high, management is focused on reducing these and has a track record of delivering savings.

Berenberg expects it will take time for RBS to deliver on these plans, which will lead to some revenue erosion. It expects the core bank to generate 19p of earnings per share and 10% return on equity ROE by 2017.

“In the short term, the final payment on the government’s dividend access share and actions to close the pension deficit are expected to reduce TNAV by around £1.3bn and £1.6bn respectively.

“Moreover, while recent provisions for civil litigation and PPI redress mean RBS is likely to have passed the peak of conduct costs, these remain a material and uncertain headwind.”

At 1014 GMT, RBS shares were up 0.7% to 231.50p.