Jefferies jacks up RBS target in anticipation of 'large scale capital return'

Analysts at Jefferies jacked up their target price for shares of RBS following a meeting with the lender's finance chief, Katie Murray, that saw them come away with "more conviction than ever around large scale capital return".

Following their discussion with Murray, the analysts penciled-in £1.3bn-worth of buybacks and a corresponding reduction in the lender's share count that saw their 2021 based target price rise from 341p to 489p.

That share count reduction accounted for 123p of the bump-up in their target price.

"However unlikely in practice," the analysts said, RBS's finance director had emphasised the ability to purchase an additional 10% of shares on the open market "prospectively meaning that RBS could buyback up to 14.99% of its shares in a year".

On the asset side of the equation, the analysts said it was reasonable to anticipate stable net interest margins even if the hike in Bank Rate that was projected to take place in the third or fourth quarter of 2019 was pushed into the following year.

Each 25 basis point rate hike from the Bank of England was equivalent to £250m of incremental revenues over the subsequent 12 months, they estimated.

"As an asset sensitive bank, RBS’s revenue would be supported by higher base rates and we believe at least two 25bps rate hikes are needed to drive a 2021 C/I meaningfully below 50%," they added.

Things were also looking up on the other side of the lender's balance sheet, Jefferies said, pointing to the fact that in just the first quarter RBS had completed more than half of the MREL issuance planned for the entire fiscal year, with spreads in-line with the levels seen last June, when the lender had last funded, and the decision to call a €1.0bn Tier 2 3.625% note.

"This positive backdrop on the credit side bodes well for the equity story, in our opinion."

Jefferies stood by its previous 'buy' recommendation on RBS shares.