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Bank swaps: Morgan Stanley upgrades RBS, downgrades both Lloyds and Barclays

The US investment bank raised its stance on RBS to ‘overweight’ from ‘equal-weight’ with an increased target price of 330p from 265p, with the shares trading at 288.6p
RBS sign
Meanwhile, both Lloyds and Barclays’ saw their ratings cut back to ‘equal-weight’ from ‘overweight’ by Morgan Stanley

Royal Bank of Scotland Group PLC (LON:RBS) topped the FTSE 100 leader board in late morning trading, boosted by an upgrade from Morgan Stanley in a review of the UK banking sector which also saw them downgrade both Lloyds Banking Group PLC (LON:LLOY) and Barclays PLC (LON:BARC).

The US investment bank raised its stance on RBS to ‘overweight’ from ‘equal-weight’ with an increased target price of 330p from 265p, with the shares trading at 288.6p, up 8.1p or 2.9% on last night’s close.

READ: RBS has reportedly agreed the sale of Lombard Finance's offshore leasing business for £150mln

Meanwhile, both Lloyds and Barclays’ saw their ratings cut back to ‘equal-weight’ from ‘overweight’ by Morgan Stanley, with their targets reduced to 75p from 80p and 215p from 230p, respectively.

Lloyds shares slipped 0.02p lower to 68.38p, while Barclays shed 1.1%, or 2.2p at 199.6p.

In the note to clients, the Morgan Stanley analysts said: “We believe RBS offers better earnings visibility vs. peers as market share wins in mortgages will make it less vulnerable to ongoing asset spread compression in the segment.”

They added: “At the same time, substantial deleveraging in its corporate book and less exposure to consumer should see more resilient asset quality performance if macro were to deteriorate.”

The analysts also estimate that, with a lower increase in capital requirements than its peers, RBS could afford share buybacks equivalent to 15-20% of its market cap over time on top of dividend payments.

Litigation risks remain

They said litigation costs remain the biggest risk in 2018, with RBS expected to settle with the US Department of Justice on mortgage-backed securities mis-selling soon, with Morgan Stanley factoring-in a £2.5bn provision top-up in the fourth quarter of 17, which is the average of the fines it has tracked.

For Lloyds, the analysts said that, despite higher capital requirement, it is more optimistic on the margin outlook than consensus; however, with the stock trading at 1.3 times estimated tangible book value they see less room for a re-rating.

For Barclays, the analysts said they believe investors would need to assume £750mln-£1bn higher market revenues versus the bank’s estimates to buy the stock - 20% upside.

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