RBS Financial Plans "Ambitious", say Analysts

RBS may be back in black after turning around £7 billion losses in 2016 to a £750 million profit last year, but equity analysts think 2018 targets are too high

Derya Guzel 26 February, 2018 | 7:53AM
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Royal Bank of Scotland returns to profit financial stocks banking sector UK equities

Royal Bank of Scotland (RBS) posted full-year annual net income of £752 million versus a £7 billion net loss in 2016. While lower than we were expecting, net income was higher than the consensus loss estimate. While operationally somewhat better than last year, significantly lower litigation and conduct cost and lower restructuring costs helped RBS to return the bank to profit. Although it is rather slower than peers, it seems RBS management has found a good path to resolve outstanding issues and to operationally catch up with other banks on digitalisation.

During the conference call held by management, RBS management reiterated its target of a 50% cost/income ratio by 2020. However, it has also increased its restructuring cost target by £1.5 billion to £2.5 billion.

While we will be reviewing our cost estimate in the light of new guidance, as we have indicated previously, we find a 50% cost/income ratio rather ambitious. RBS also has outstanding litigation cases, the largest one being the U.S. residential mortgage-backed securities and the US Department of Justice. This remains a downside risk to the firm's 2018 and 2019 bottom line. We will be plugging in 2017 actual numbers and rolling our model; however, we don’t expect a major shift for our fair value estimate.

While profitability seems to be improving and restructuring is tracking as management planned, we still think risks are to the downside for RBS in the short run, and Lloyds remains our preferred name in UK banks. We retain our no-moat and stable moat trend ratings.

On the revenue line, net interest income increased by 3% year over year, better than we estimated. Looking at the segmental breakdown, the good performance was driven by higher mortgage volumes in UK personal and business banking and deposit repricing benefits in commercial banking, partially offset by the impact of the planned balance sheet decline in NatWest Markets.

As rates are increasing and management expects new mortgage lending to come through and to continue gaining market share in 2018, we expect the stable picture for net interest income generation to continue.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
NatWest Group PLC321.80 GBX-0.56Rating

About Author

Derya Guzel  is an Equity Analyst for Morningstar

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