Broker snap: Bad bank will accelerate RBS dividend payments

11th Nov 2013 11:43

Analysts at Jefferies think little of the received wisdom that the creation of an internal bad-bank at RBS has kicked the investment case for RBS into the long grass. Quite the opposite, they believe that, if anything, visibility on returns for the Core business increases as does its fundamental capacity to pay a dividend from 2015. Formal, short-lived "bad bank" unlocks valueMore specifically, they identify nine ways in which the creation of RBS Capital Resolution (the so-called "Internal Bad Bank") benefits shareholder value. First and foremost is that the short (three-year) and formal timetable with which the group will dispose of Capital Resolution assets allows investors to value RBS as the sum of the "good" and "bad" banks. That generates a valuation some 50p greater than valuing the businesses on a combined basis. Specifically, they calculate 20p/share of value for the "bad" bank and see 421p/share of value in RBS's Core business, for a total target price of 441p (up from 390p previously). It also means that the lender's core business now generates a return on tangible equity (ROTE) of 13%, a full 200 basis points more. They also highlight that they do not believe that the Dividend Access Share is a £1.5bn impediment to common dividend pay-outs, adding that, "the government's constructive tone change around this share in its report on the case for an RBS bad bank was 'something new'."RisksThe biggest risk to their valuation arises from litigation. Some market participants suggest there is up to £4bn of litigation exposure for RBS. If true, that would equate to 36p/share, they explain. RBS faces political risk due to the government's 80% shareholding. There is also execution risk related to the run-off of RBS Capital Resolution. As of 11:30 shares in RBS are up by 2.95% to the 332p level. AB