Broker snap: RBS is losing earnings power, says Nomura

28th Feb 2013 10:56

Nomura has reiterated its 'reduce' recommendation and 300p target price for UK lender Royal Bank of Scotland (RBS), citing a decline of earnings power.Profit before tax (PBT) before exceptions came in at £3.462bn in 2012, a touch below the consensus estimate of £3.5bn, causing shares to fall sharply on Thursday morning, by 4.33% to 331.79p at 10:48.While the figure was in line with Nomura's estimates, the broker said that, adjusting for one-off items, "we see 4Q results as a miss"."Reported Core PBT was £6,341m, which, if we adjust for Global Banking and Markets (GBM) costs, Ulster, Direct Line Group and levy among other items, leads us to a Core earnings per share of c38p whereas we were modelling c39p before. Prima facie, this is a decline of Core earnings power."Nomura said that deleveraging is clearly ahead of track but earnings power is struggling to remain stable. "Clear improvements" are needed in GBM and the US retail arm Citizens at the least, the broker said."The outlook statements point to continued subdued growth prospects in the UK, the group's most important market, and a persistent macroeconomic risk in the Eurozone, more generally within the global economy," Nomura added.Shares are trading at 9.2 times current Core EPS, improving to 8.2 times by 2014."Given that we still see non-core headwinds for the group in 2014, this still looks rich relative to our 'buy'-rated peers in the continent. We remain cautious."BC