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UBS says RBS 'optionality' undervalued, reiterates 'buy'
15th Aug 2019 13:22
(Sharecast News) - UBS reiterated their 'buy' recommendation for shares of majority state-owned lender RBS in the wake-off of weakness in the share price following its second quarter results, arguing that while not wholly unexpected, the stock was now "oversold" - if one made an assumption or two.
"With yield curves implying rate cuts ahead, Brexit uncertainty high and 2Q19 results a 7% miss driven by net interest income we weren't surprised to see the share weak, post reporting. But here we think the stock is oversold and its capacity to return excess and future surplus capital generation is undervalued," analysts Jason Napier and Charmsol Yoon said in a research note sent to clients.
However, their revised estimates assumed that Bank would not cut rates and that margins would stabilise in the backhalf of 2020.
In turn, that hinged on a Brexit agreement finally being reached or an extension being granted, and that the ongoing "meaningful" recovery in front book mortgage spreads would stick, they said.
Nonetheless, they were expecting RBS to return 30.0% of its market capitalisation to shareholders via either dividends or share buybacks over the next two years.
And if needed, the new chief executive officer had the option to funnel those resources into a restructuring of underperforming businesses or investments to lower operating expenditures.
That "optionality," they argued, was "undervalued".
Nonetheless, they did mark down their estimates for RBS's earnings per share between 2019-22 by 12-16.0%, which together with peer group multiples and prospective restructuring charges led the analysts to lower their target price from 285.0p to 265.0p.
"With yield curves implying rate cuts ahead, Brexit uncertainty high and 2Q19 results a 7% miss driven by net interest income we weren't surprised to see the share weak, post reporting. But here we think the stock is oversold and its capacity to return excess and future surplus capital generation is undervalued," analysts Jason Napier and Charmsol Yoon said in a research note sent to clients.
However, their revised estimates assumed that Bank would not cut rates and that margins would stabilise in the backhalf of 2020.
In turn, that hinged on a Brexit agreement finally being reached or an extension being granted, and that the ongoing "meaningful" recovery in front book mortgage spreads would stick, they said.
Nonetheless, they were expecting RBS to return 30.0% of its market capitalisation to shareholders via either dividends or share buybacks over the next two years.
And if needed, the new chief executive officer had the option to funnel those resources into a restructuring of underperforming businesses or investments to lower operating expenditures.
That "optionality," they argued, was "undervalued".
Nonetheless, they did mark down their estimates for RBS's earnings per share between 2019-22 by 12-16.0%, which together with peer group multiples and prospective restructuring charges led the analysts to lower their target price from 285.0p to 265.0p.