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Royal Bank of Scotland downgraded by Morgan Stanley

Published: 12:01 18 Oct 2011 BST

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Royal Bank of Scotland Group (LON:RBS) was downgraded to ‘underweight’ by Morgan Stanley today as the investment bank believes the shares – 23.8 pence each just before midday – “are fairly valued on our revised forecasts”.

Morgan Stanley noted that significant progress has been made since 2008 in reshaping RBS, but revenue pressures “mean the earnings recovery is still some way off”. The investment bank said it sees greater share price upside at other European banks.

Meanwhile, Collins Stewart posited the question: “Where’s the dividend play?” in its short note on European banks this morning.

“At first sight European banks still appear to offer striking dividend yields, and, at a weight 4.8 per cent, a sectoral yield twice that of the US banks in 2011,” said the broker. “Despite their recent price bounce, six banks offer financial year 2011 yields topping 6.5 per cent and a further three topping five per cent. It should come as little surprise that the list is dominated by French, Spanish and Italian banks.”

Collins Stewart said it is still an open question whether a European-style TARP (Troubled Asset Relief Program), as used by the US government to purchase assets and equity from financial institutions to strengthen the financial sector, would force recapitalising banks to cut their dividend and even strong banks to curb their dividend per share growth. “Prudence would treat it as a realistic threat,” said the broker. “The US banking sector, which has long been less of a yield sector than its European counterpart, saw its own yield plunge as a result of the US TARP programme. It has still not fully recovered.”

So, according to the broker, European banks “may be shifting from one yield trap to another” as the yield risk "migrates from the denominator to the numerator", although it said that the lower-yielding Swiss and UK banks look less vulnerable to this political TARP risk.

In particular, Collins Stewart said, it is highlighting its ‘buy’ ratings for Credit Suisse and Standard Chartered (LON:STAN) and, “a little further out the risk curve”, Barclays (LON:BARC) and BNP Paribas.

“These names offer attractive yields relative to other asset classes,” said the broker. “More importantly, we believe our dividend estimates for these names are realistically cautious relative to the banks’ roll-forward capital compliance outlook on Basle 2.5/III and G-SIFI timetables, while their share prices appear to be over-discounting the results of a more stringent round of stress tests and a degree of share dilution that we consider unlikely.”

Collins Stewart has set price targets of 310 pence, €49, SFr43 and 1,850 pence for the shares of Barclays, BNP, Credit Suisse and Standard Chartered respectively. Shares in these firms were trading at 171.45 pence, €29.12, SFr24.18 and 1,365 pence in late-morning trading today.


 

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