Investec downgrades RBS to 'sell' on weak outlook

3rd Nov 2014 09:17

Investec has downgraded its recommendation for Royal Bank of Scotland from 'hold' to 'sell' despite Friday's well-received third-quarter results, saying that the earnings and returns outlook for the bank is still weak.Analyst Ian Gordon acknowledged that RBS' performance in the third quarter was "encouraging" and that he remains happy with the bank's capital metrics."With a common-equity tier-1 ratio of 10.8% (even before the Citizens deconsolidation uplift), we see its capital position as bullet-proof," he said.Looking ahead to next year, however, the analysts pointed out that RBS will be faced with lower revenues, higher conduct and restructuring costs, as well the payment of the residual £1.2bn dividend access share settlement."Taken together, we see RBS achieving around break-even in 2015. We model a decline in tangible net asset value (tNAV) per share to 382p."Gordon said that RBS' weak outlook for earnings and returns does not support its current valuation, with the stock trading in line with third-quarter tNAV."It is true that RBS is (by far) the top performing UK bank year-to-date. However it has regularly offered clear (short-term) selling opportunities throughout the year and we believe the strength of Friday's euphoria has just presented another one," Gordon said.The broker has raised its target price for the shares from 360p to 370p, which implies around 5% downside to current prices. The stock also has "no dividend support", Gordon said.Shares fell 5.7p or 1.47% to 382.3p at 10:07 in London.