Broker snap: Citi sees poor earnings momentum at RBS

2nd Sep 2013 09:08

Citigroup has maintained its 'sell' rating for UK lender Royal Bank of Scotland (RBS) and has slashed its profit forecasts for the company citing weak earnings momentum.The broker said that RBS remains its least-preferred UK bank "based on the shareholder structure, ongoing political and regulatory uncertainty, and a weak medium-term return potential relative to peers"."We see a slow and painful recover at RBS over a prolonged period and reiterate our 'sell'/'high risk' rating, target 270p (unchanged)."While second-quarter results on the whole came in slightly better than expected, Citi said this beat was "low quality" given that it was entirely due to the Corporate and non-core businesses. It has trimmed its group underlying 2013-2015 profit before tax forecasts for RBS by 4-9% following a weak core bank result in the second quarter."Short-term steps to improve RBS' capital & liquidity position have been at the expense of long-term profitability, damaging shareholder value in our view. In the past 12 months 2013 consensus earnings per share estimates for RBS have declined by 30%, despite a relative absence of 'one-off' charges in 1H13 compared to previous years."The broker said that "external pressures (both political and regulatory)" have forced the UK lender to downsize its investment bank "to such an extent that we struggle to see how the core franchise can ever be restored". While the move has improved its capital position, returns from this business have collapsed, Citi said. The broker is sceptical about whether RBS can meet its 2015 targets for an underlying (Basel II) Markets return on equity of 10-12% with operating profit of over £1bn - Citi itself forecasts figures closer to 7% and £0.8bn, respectively.Meanwhile, ahead of the Treasury's report on the potential breaking of the bank due by the end of September, Citi said that proposals for a 'good bank'/'bad bank' split are likely to be dismissed due to its complexity, potential cost to the taxpayer and probably dissent from minority investors. "However this adds to existing uncertainty," it said.Despite the gloomy comments, shares in RBS were up 1.05% at 337.2p by 09:36 on Monday, performing in line with wider market strength.BC