HSBC trims target price on RBS

Royal Bank of Scotland was still on track to generate considerable surplus capital in the medium-term, but the exact amount and timing of any distribution were uncertain, HSBC said.

As well, possible delays to the separation of Williams&Glyn meant the lender might breach its State Aid Commitment which could trigger additional remedies, analysts Peter Toeman and Robin Down said in a research report sent to clients.

For the Prudential Regulatory Authority to approve a re-start of dividend payments RBS first needed to settle its litigation in the US linked to residential mortgage backed securities, to assure its exit from Williams&Glyn and pass the Bank of England's 'stress test' for 2016.

RBS also needed to maintain a minimum buffer of reserves equal to 13.0% of its common equity Tier 1 capital.

Unfortunately, alongside its first quarter numbers management said difficulties in creating a cloned banking platform might push the separation of Williams&Glyn beyond the end-2017 deadline set by the regulator.

"In any event the financial cost of separation is likely to be significantly greater than the original estimate of GBP1.1bn (treated as a restructuring charge)," they said.

Combined, with disposals/run-off of £47bn in risk weighted assets now in the pipeline and an estimated cost of additional litigation and regulatory fines of $8bn, CET1 would be in excess of 18% by the end of 2018, equating to surplus capital of £11bn over its 13.0% CET1 threshold, the broker estimated.

"However at this stage the exact of quantum of surplus capital, and timing of distribution, (most likely through repurchase of part of the Government’s 73% interest) remains highly uncertain."

Toeman and Down reiterated their 'hold' recommendation but lowered their target price from 260p to 240p.