Goldman Sachs downgrades RBS on valuation

16th Jan 2017 07:43

(ShareCast News) - Goldman Sachs downgraded Royal Bank of Scotland to 'neutral' from 'buy' on valuation grounds and removed the stock from its Pan-Europe Buy List, but upped the price target to 270p from 240p.GS noted the stock is up 47% from its lowest point following the EU referendum and at the current valuation, the bank's price target implies broadly sector-average potential upside of 24%, hence the downgrade.Since being added to the 'buy' list on 15 March, the shares are down 7% versus the FTSE World Europe up 19% and its EU banks coverage up 5%.Goldman attributed the underperformance relative to the sector mainly due to the impact of the referendum outcome, which led it to significantly cut its earnings forecasts due to expectations of lower loan growth and rates and higher credit costs.For this year, GS sees two key developments: a resolution to the EC-mandated disposal of Williams & Glyn and settlement of litigation regarding residential mortgage-backed securities issuance."We view the outstanding litigation settlement as the most significant unknown for the group. In light of recent US Department of Justice RMBS settlements with other banks, we see the possibility that RBS will book a significant provision as early as 4Q16."It added: "Given RBS's structural funding advantage, we continue to see its sustained mortgage growth strategy as optimal, but see the benefit of this increasingly reflected in the price."Goldman highlighted a preference for Standard Chartered and CYBG.