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Consensus underestimating potential for higher dividends from RBS, Berenberg says

By Alexander Bueso

Date: Wednesday 20 Feb 2019

Consensus underestimating potential for higher dividends from RBS, Berenberg says

(Sharecast News) - Analysts at Berenberg reiterated their 'buy' stance and 340.0p target price on RBS stock despite the shares' outperformance year-to-date, arguing that there was scope for "material" capital returns of roughly 12% per year and that the lender continued to be "undervalued".
"RBS's strength and capital return potential are becoming hard to doubt," analyst Peter Richardson said.

Notwithstanding the uncertainty in the UK, the lender was generating underlying returns of over 10%, and there was scope for costs savings to lift that to management's 12% target.

Indeed, RBS had blown past consensus estimates (and Berenberg's) for its full-year 2018 payout, delivering 13p per share.

Its ability to deliver a payout that was about 40% greater than Berenberg's already above consensus estimate underlined how "insufficient" the consensus forecasts for 2019 and 2020 were, Richardson said.

In a nutshell, markets were wrong in their perception that RBS remained a 'restructuring story'.

"While UK uncertainties persist, we take reassurance from RBS's modest revenue growth (of c3.5%) and robust asset quality (as shown by UK stress tests)," Richardson added.

Furthermore, operating costs were seen falling by another £300m in fiscal year 2019.

The analyst went on to explain that for the first time his estimates were now anticipating share buybacks, of £1.0bn in 2019, rising to £1.5bn thereafter.

Hence, Richardson believed RBS could return about £3.8bn of capital over the next three years, while maintaining a buffer of 70 and 30 basis points in 2020 and 2021 above its common equity Tier 1 capital target of 14.0%, respectively.

"We believe RBS's ability to conduct directed buybacks can meaningfully offset headwinds from the government's stake sale," he added.



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