Bernstein slashes target on RBS, says Brexit risks have killed risk appetite

The fact that the short-term rates are not going to rise anytime soon – indeed they might yet fall – faltering demand for credit in the UK, expectations that unemployment in Britain would rise by the end of 2016 and the now “extremely unlikely” resumption of dividend payments this year all led analysts at Bernstein on Thursday to downgrade their recommendation on shares of RBS and halved their target price.

The broker downgraded its view on the shares of the still mostly state-owned lender's shares from ‘outperform’ to ‘market perform’ and slashed their target price from 450p to 230p.

“Since then the macro outlook in the world (and the UK specifically) has deteriorated significantly and in the same time, legal settlements / disposals which were the prime drivers of excess capital have been pushed out.

“We still like the franchise but the next 12 months will be an uphill task with deteriorating earnings fighting against elusive excess capital,” analysts Chirantan Barua, Daniel Lasry and Mark Burrows said in a research note sent to clients.

Brexit risks have killed risk appetite

Interest rates were a big ‘swing factor’ in the broker's reduced valuation, given that RBS was the most sensitive stock to UK short rates in Bernstein’s coverage.

Although Britain’s ‘number-1’ mid-market and SME bank was now ready to loan, even after seven years of deleveraging the market was unlikely to turn in the next few years, with Brexit having “killed” risk appetite in the first half of 2016, the analysts said.

Furthermore, RBS had shifted the goalposts for a resumption of dividend payments from a settlement on residential mortgage backed securities-related legal issues in the US to a disposal of Williams &Glyn.

Bernstein pointed out how in the words of RBS’s own boss, Ross McEwan, “the separation of the business will run beyond the first quarter of next year. I've said before, and I will say it again, that this is a very, very complex process.”

"Any regulator who’s heard this will now have no incentive to approve the resumption in dividend until W&G gets out of the way,” Bernstein said.

The broker was now forecasting a token dividend from RBS in the first half of 2017 to be paid to shareholders in the second half of next year.