Royal Bank of Scotland Group PLC (LON:RBS) shares look “cheap enough” after falling 18% over the past three months, HSBC Global Research said as it upgraded the lender.
In a note on UK banks on Friday, HSBC raised its rating on RBS to ‘buy’ from ‘hold’ and lifted its target price to 290p from 280p.
The investment bank said shares in RBS have been particularly weak since the government reduced its stake to 62.4% from 70.1% in June.
"RBS has been the worst performing UK domestic bank stock year-to-date," HSBC said.
"In part we believe this is due to the recent government placing."
The government, which bailed out RBS during the financial crisis in 2008, decided to sell some of its shares after the bank dealt with the last of its major legacy issues by agreeing to pay US$4.9bn to settle a US Department of Justice investigation into claims it misled investors over the sale of residential mortgage-backed securities.
HSBC expects RBS to start buying back shares in 2019
HSBC said in future, RBS should be able to buy-in some 50% of the UK Treasury’s planned future sell-downs, reducing technical pressures.
It believes RBS should be in a position to begin buying in stock in early 2019 if it passes this year’s stress test. The results of the Bank of England’s stress test are due to be published in December.
“Once that hurdle is passed, RBS should be able to buy in 5% of its shares each year from the government.” HSBC said.
READ: UK Govt marks Royal Bank of Scotland’s decade of woe with £2.5bn share sale
HSBC also thinks there are “good reasons why the threat from future government placings might be more limited”.
“We think it unlikely that the government will place another block of stock in the near term,” HSBC said.
“Rather as the overhang from the last placing is still being worked through, its highly likely that the next placing will be done in 2019.”
HBSC said RBS is one of the more exposed banks to the economic risks stemming from a ‘hard’ Brexit but sees little support in Parliament for a ‘no deal’ scenario. The political risk will also diminish once the government reduces its stake further, HSBC said.
HSBC cuts Lloyds target price
In its note, HSBC maintained a ‘hold’ rating on Lloyds Banking Group PLC (LON:LLOY) but cut its target price to 68p from 72p.
HSBC said Lloyds’s second quarter results showed limited loans growth and broadly flat margins but “very strong profitability, thanks to a low cost-income ratio and low impairments.
“True, fee income was better than expected, but in large part this appears to have been driven by stronger than anticipated gains on the sale of the legacy gilt book (£191mln in the first half against management full year guidance of around £250mln). And while the stock has fallen 9% in the last three months, we feel in no particular rush to upgrade our rating.”
READ: Lloyds first-half profits rise 23% despite extra £460mln provision for PPI claims
HSBC added that it thinks the common tier 1 equity ratio targets need to rise and may be forced to after this year’s stress test.
Barclays still HSBC's preferred play
Barclays PLC (LON:BARC) remains HSBC’s preferred play.
HSBC left its rating on the stock at ‘buy’ and increased its target price to 270p from 260p, saying it is confident Barclays will earn “something close to a ‘cost-of-equity’ return on tangible equity in 2019”.
READ: Barclays first half profits slide as litigation and conduct costs bite
Barclays will benefit from tax cuts in the US, given that 40% of its profits come from operations there while revenues are expected to grow and the under-pressure investment bank has started to bounce bank.