Investec upgrades RBS to 'hold', but still prefers Barclays

20th Mar 2014 10:26

Investec has raised its rating for UK banking group Royal Bank of Scotland from 'sell' to 'hold' following the recent slump in its share price, but continues to recommend investors to avoid the stock.Analyst Ian Gordon pointed out that the shares again corrected sharply and have now fallen 17% over the past three weeks since RBS' 2013 results. The slump came "as the market absorbed a fresh dose of reality: a £9.0bn loss in 2013 and de facto guidance for zero earnings through 2014-15 too - eight straight years of losses", he said.Gordon said he sees "some hope" in the company's ambitious cost-cutting and restructuring plans under Chief Executive Ross McEwan, "but it comes at a high price with planned revenue give-ups in Markets, International and Citizens".With the stock now trading at just 0.8 times tangible net asset value (tNAV), compared with a then-premium multiple of 1.0 in February, the broker has upgraded its rating."However, why own RBS when profitable, defensive and dividend-rich Barclays ('buy') trades on 0.8 times [tNAV] too?" Gordon said.He continues to expect RBS' cost of equity will remain larger than its return on equity until 2018, and highlighted "quite considerable execution risk as well as an unhelpful political backdrop"."RBS is a peculiar stock that, in our view, has a recurring tendency to benefit from irrational exuberance between financial reporting. Partly for this reason, we retain a tactical preference to be short into results, and neutral (with a positive bias) 'in between' when we perceive that upside risks are greater," Gordon said.The stock was up 0.45% at 302.86p by 10:38 on Thursday.BC