Payout uncertainty sees UBS downgrade RBS to ‘neutral’

UBS said first-quarter adjusted pre-tax profit of RBS’s ongoing businesses beat its estimates by 16 per cent, with all meaningful divisions overall more profitable than it had expected.

However, UBS said, “despite a core bank which is outperforming our expectations and mostly composed of businesses we think attractive, the risks on the timing of capital returns are now too significant for us to maintain a buy”.

UBS said it sees broadly as much surplus capital as before but said that in providing for £11bn in losses and charges between 2016 and 2020 for non-core run-down, restructuring costs and legacy liabilities, it expects RBS to have the capacity to return 40 per cent of market cap over three years.

UBS said that without the return of surplus capital in the nearer term, RBS looks fair value, trading at 0.7x tangible net asset value for a 6-7 per cent return on tangible equity.

“Though our 2018-2020 dividend yield estimates are well over 10 per cent, the higher risks attaching to these later payments, and greater concerns around capital tied up in the ongoing bank are the key drivers of a fall in our sum of the parts-derived target price to 250p from 310p.”

At 1100 BST, RBS shares were down 3.4 per cent to 222.10p.

Morningstar equity analysts has also dropped RBS from their global list of best investment ideas due what it said was concerns around Brexit.

Morningstar equity analysts are removing RBS from its Best Ideas list of undervalued high-quality stocks.

It said that, “While our thesis that the bank will build up to £20 billion of capital to return to patient shareholders remains intact and we think the shares are attractively priced, we think recent political events in the United Kingdom may mean that the road to get there will be rockier than we anticipated. We’re particularly concerned about the impact of uncertainty about Brexit, which we think has already had a negative impact on economic growth and RBS’ ability to sell noncore assets. We think the negative impact is likely to linger on through 2016, even if a no vote prevails as we expect. We prefer to steer investors toward banks with more near-term upside, such as Citigroup, trading at a 29 per cent discount to our fair value estimate.”

On Friday Edinburgh-based RBS announced a loss of £968m for the first quarter of 2016 on the back of a £1.2bn dividend payment to the government as a result of its £54 billion bailout at the height of the financial crisis.

Meanwhile, a FTSE-100 chairman who assembled a consortium of top City investors to acquire Williams & Glyn (W&G) in 2013, said the RBS board “must rue the day” that his offer was rejected.

Technology issues have plagued the separation of W&G from RBS, which was a condition of the bank’s £45bn taxpayer bailout in 2008.

The bank’s chief executive, Ross McEwan, recently described the project to fulfil the obligation as “the most complex I’ve seen anywhere in banking in the world”.

Andy Higginson made the claim after RBS said last week that a deadline of the end of 2017 imposed by Brussels may now be missed, with the cost “now likely to be significantly greater than (the £1.7bn) previously estimated”.

Speaking to Sky News, Mr Higginson, who now chairs supermarket chain Wm Morrison, said: “I’m sad to see that the Williams and Glyn sale process has been delayed yet again.”

He added: “The RBS board must rue the day they rejected the £1.3bn cash bid from blue-chip UK institutional shareholders.

“It still remains a mystery as to why, having turned down that bid, RBS didn’t handle the IPO themselves, as they did with Direct Line and Citizens, or as Lloyds did with TSB.”

The still 73 per cent state-owned lender holds its AGM at its Gogarburn HQ today.