Broker snap: Less could be more at RBS

25th Jun 2009 09:56

Royal Bank of Scotland, a day after The Banker magazine named it the worst performing bank in the world during 2008, was sitting close to the top of the Footsie leaderboard in early trading on Thursday after broker Cazenove turned positive on the bank.Subscribing to the "less is more" dictum, Cazenove says the appeal of Royal Bank of Scotland (RBS) is that it intends to reduce in size, and it has plenty of assets outside its UK heartland that it can, and will, offload. "The pace of change will not be rapid; management has warned it will take three to five years. Yet with the downside substantially protected from a combination of £40bn of new equity and the government's Asset Protection Scheme (APS), relatively, we feel the shares are attractive trading at book value. The upside comes from quicker progress in de-risking the group which can shift investor attention to the potential earnings recovery," the broker states.Cazenove has shifted its rating of the shares, moving from "underperform" to "outperform"."On a balance sheet one-third smaller, we estimate potential earnings [per share] of 6.5p without assuming a full recovery in net interest margins," Cazenove said. The broker believes that the share price could return to 60p, a level not seen since December of last year, although with the outlook for UK banking uncertain the broker declined to put a time scale on its price target."If consolidation of the industry and tighter regulation lead to a less competitive market, the earnings potential can be materially higher. That potential combined with the reduction in risk from reducing the balance sheet are the key attractions of RBS," the broker concludes.