UBS ups RBS to 'buy' as it re-initiates coverage on UK banks

UBS re-initiated coverage on the five large UK banks, backed by new models and analytical support.

It upgraded Royal Bank of Scotland to ‘buy’ from ‘neutral’, cutting the target price to 350p from 363p.

UBS argued that until now, the bank's small index weight - 0.6% of the FTSE 100 - and legacy issues have given investors sufficient excuse to avoid the shares.

However, “the recent selloff has seen RBS fall too far, in our opinion, leaving it a lower risk and more attractive return prospect than the market appreciates.”

It said RBS is looking more attractive as the investment bank shrinks and costs are radically reduced, targeting a 55% cost/income ratio in 2018.

UBS added that risks from ring-fencing and other regulatory changes are now considered much lower than at Barclays, for example.

Lloyds Banking Group, which it rates at ‘buy’ with a slightly lower price target of 88p from 97p, remains the bank’s key call.

“Though the UK rate view presents risks to 2017 income levels, we think LBG has more room to manage interest income than the market believes, via mix change, and deposit and wholesale funding re-pricing.”

UBS kept its ‘buy’ ratings on HSBC and Barclays, cutting the price targets to 520p from 540p and to 215p from 302p, respectively.

Meanwhile, it maintained Standard Chartered at ‘neutral’, trimming the price target to 510p from 609p

UBS pointed out that UK banks have started 2016 poorly and full year 2015 are likely to include sombre trading updates.

In Lloyds and RBS, its preferred names, it sees attractive businesses, lower regulatory risk, and 46-58% of market cap returned by dividend or buyback by end-2020E.

“Given weak recent performances we remain Buyers of HSBC and Barclays too, though we see lower total returns and higher regulatory risk,” the bank said.

As far as StanChart is concerned, however, it said the de-leveraging and de-risking process is likely to pressure income as loan-losses rise.

At 0923 GMT, RBS shares were up 1.2% to 254.20p, Lloyds was up 0.8% to 63.65p, HSBC was down 1.6% to 465.70p, StanChart was off 1.9% to 469.30p and Barclays was down 1.6% to 177.10p.