Stress tests to unleash shareholder returns at RBS, Morgan Stanley says
By Alexander Bueso
Date: Tuesday 19 Jun 2018
(Sharecast News) - Upcoming stress test results should trigger the release of a large amount of pent-up regulatory capital at RBS, analysts at Morgan Stanley said as they bumped-up their target price for the shares.
Also, continued growth in its Retail arm and in mortgages was seen delivering compound annual growth of 3% over the next three years, alleviating margin pressures, facilitating a strong margin build and therefore capital returns.
Together with the lender's existing room to manoeuvre when it comes to improving the efficiency of its capital structure, that should allow for a normal dividend payout of 40%, special dividends, and a £2.0bn share buyback programme.
Combined, their expectation was that those factors would drive total shareholder returns of 23% between 2018 and 2020.
Hence their decision on Tuesday to boost their target price for the shares from 315p each to 335p, while reiterating their 'overweight' stance on the same.
"RBS remains our preferred UK domestic name. The stock is trading on 9x adjusted earnings vs. the sector on 11.7x while offering one of the highest shareholder return profiles in Europe together with Lloyds and Nordic banks. We would regard an interim dividend as a show of confidence from the regulator and a catalyst for the stock," they said.
Critical to their investment thesis, on Morgan Stanley's estimates RBS was sporting a 2018 common equty Tier 1 capital ratio of 16.4%, versus their estimate of a steady-state requirement for 13.5%.
Hence, once it passed those stress tests, RBS should be able to pay-out "at least" 100% of its projected earnings for 2019/2020 in the form of dividends.
On top of that, the broker believed there was room to call, tender or redeem £6.0bn-worth of the legacy £18.0bn of subordinated debt instruments sitting on its balance sheet.
That might save it about £200m over the next three years, Morgan Stanley said, which its analysts had previously not factored-in.
"Beyond that we see further room to go as AT1s and more Tier 2 instruments get refinanced," they added.
RBS was unlikely to act imminently, the analysts explained, given current cash prices.
But the $6.425%, $7.648% Tier 1s and the $7.125% and $7.75% Tier 2s issued by RBS NV were all deemed "attractive tender opportunities".
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