UBS bullish on RBS's ability to return capital, but cuts target price

Markets were underestimating the ability of RBS to return capital to shareholders and deliver "significant" earnings per share accretion, UBS said.

Investors had grown tired of restructuring stories, and RBS had missed earnings estimates, delayed dividends and was struggling to turn around its corporate and institutional banking division, UBS explained.

"Still, though near-term trading will likely be subdued and legacy issues remain outstanding, we see a real opportunity here," UBS analyst Jason Napier said in a research report sent to clients.

The lender had a market capitalisation of £27bn and £9bn in excess capital and litigation reserves at the time of writing, Napier pointed out.

Run-off and restructuring should see that rise to £13bn, "without allowing for organic capital generation", he added.

So while further legacy charges - the timing of which was anyone's guess - should be expected, "that surplus capital will remain, underwriting significant dividends and buybacks, delivering significant EPS accretion in a stock which few own, we think."

Furthermore, there was a "pretty attractive" core bank hidden inside, UBS said, pointing out how well over 80.0% of the capital was deployed in non-CIB business.

Napier stuck to his 'buy' recommendation on RBS stock, which was trading on 1.06 times adjusted earnings per share for 2017 (10 times 2017 EPS if the drag from run-off was excluded).

He did however cut his target price from 340p to 310p.

"Key to our positive stance, therefore, are the strong capital returns we see, from 2017E, implying a double-digit return each year, or buybacks which cut the overhang and deliver EPS accretion."