Investec downgrades RBS, says it's no longer cheap enough in valuation terms

Investec downgraded its recommendation on Royal Bank of Scotland to 'sell' from 'hold' on Thursday, saying that in valuation terms, the stock no longer looks cheap enough.

The brokerage said it understands why many RBS shareholders are feeling pretty ecstatic at the moment, pointing out that the shares are trading at a 12-month high, up 55% year-on-year.

It said management’s credibility is "sky-high" in the context of materially better-than-expected Q1/Q2 2017 results and very strong progress in terms of strategic execution, particularly in terms of cost takeout. However, Investec expects £150m of equity issuance and a £1.8bn reported loss in the second half.

In addition, it said the shares no longer look cheap in valuation terms, trading on 1.0x estimated 2017 tangible net asset value, which places it on the same multiple as "high-performance" stock Virgin Money.

"RBS formally guides to a (10th consecutive) reported loss in 2017, whereas we expect Virgin to enjoy earnings per share growth of 24% year-on-year to 36.4p in 2017e with a return on tangible equity of 12.9%. For context, we expect RBS’ returns to remain below that level for the foreseeable future."

At 1415 BST, RBS shares were down 0.2% to 264.90p.