In a note on Monday, the US investment bank, which rates RBS at a ‘buy’ with a 418p target price, said they expected mortgage loan growth to accelerate in the fourth quarter of this year.
Net interest margin, the amount a bank earns in interest compared to interest paid out to lenders, was predicted to ease off at RBC in the back end of the current year, but Jefferies saw scope for it to “rise modestly” in 2020, driven by a shift towards UK retail banking
“High levels” of capital repatriation, when a company’s offshore assets are converted back into its domestic currency, is also seen support share price momentum at RBS and Lloyds Banking Group PLC (LON:LLOY), the analysts said, with RBS predicted to repatriate 41% of its current market cap by the end of 2021 and Lloyds 30%.
RBS is also predicted to benefit from a fall in the cost of equity, the amount the bank pays to its shareholders to compensate for their investment risk, by 10% over the coming months, giving it an extra “valuation uplift” that makes it “top of the pecking order” among the UK banks in Jefferies' coverage.
Get thee behind me, Brexit and PPI
Looking around at Lloyds, Barclays PLC (LON:BARC), HSBC Holdings PLC (LON:HSBA) and CYBG PLC (LON:CYBG), Jeffries saw all the banks as entering the new year with an extra spring in their step as they put Brexit and the PPI scandal behind them, two areas which it said had “impacted earnings, capital and suppressed valuation”.
All "asset-sensitive banks", analysts also said the UK sector could also benefit from an interest rate hike from the Bank of England, although this had not been factored into their numbers.
Lloyds, which is "over-capitalised" and expected to increase the ordinary dividend and augment returns with share buybacks, was retained at 'buy', along with Barclays and CYBG, while HSBC was the only one on a 'hold' rating.
In late-morning trading, all names in the sector were trading around 1% to 2% lower as the market's excitement over Brexit dissipated after Friday's optimism about a potential deal, including RBS down 2% to 213.6p and Lloyds down 3% to 57.58p.