Broker snap: RBS hit after UBS downgrade to 'sell'

22nd Jan 2014 09:15

Royal Bank of Scotland (RBS) was a heavy faller on the FTSE 100 on Wednesday morning after UBS lowered its recommendation for this stock from 'neutral' to 'sell' and cut its target price from 350p to 300p.In a research report out late on Tuesday, the Swiss bank said that RBS's new strategy - with management now focused on business restructuring instead of balance-sheet restructuring - should help to underpin operating improvements and business efficiency."However, we think the share price already discounts much of the progress we expect the group to make over the next 18 months or so, leaving risk of underperformance even if management outperforms business targets," said UBS Analyst John-Paul Crutchley."While we have high expectations that the management team will be able to out-perform on the operational delivery, we think the share price is starting in the wrong place."UBS has now updated its earnings estimates to reflect the sale of RBS's US business Citizens as well as its more conservative outlook for the Markets business. 2014 earnings estimates have been lowered by 3%, but the reduction of 2015 and 2016 forecasts is more severe at -14% and -19%, respectively.Meanwhile, Crutchley warned shareholders not to expect any cash returns from recent or planned disposals as RBS continues to restructure the business. This restructuring, he said, should "curtail expectations of a profitable government exit".He estimated that since the UK government's original investment in RBS through its bail-out in 2008, sustainable earnings at the bank have halved."We think the government may be able to achieve the price recorded by the National Accounts Office of 407p [at which it is expected to break-even on its investment] by the middle of the next parliament but a price above the actual 500p paid may be unlikely to be reached this decade, in our view."The stock was down 2.49% at 350.05p by 09:52 on Wednesday.BC