Royal Bank of Scotland Group PLC (LON:RBS) has been knocked down to ‘neutral’ from ‘buy’ by analysts at UBS after the British bank swung to a third-quarter loss last week and dented their earnings forecasts.
UBS, which also trimmed its target price to 235p from 255p, reduced their earnings per share (EPS) estimates for the current year by 7% to 23p after RBS reported a pre-tax operating loss of £8mln, compared to a £961mln profit in the same period last year.
The swing to a loss was mostly due to a £900mln charge set aside by the bank to compensate customers who were mis-sold payment protection insurance (PPI).
UBS said its downgraded forecast was driven by a “weaker margin outlook and assumed continued losses” at NatWest Markets, RBS’s investment bank, which in the quarter saw core earnings drop by 44.4% to £184mln due to a fall in interest rate income which it blamed on “a deterioration in economic sentiment for the global economy and a fall in bond yields”.
However, UBS analysts said they expected NatWest Markets to undergo further restructuring under RBS’s new chief executive, Alison Rose, who took the helm in September.
The restructuring would improve medium-term return on equity, UBS said, however, it would also reduce the bank’s near term capital distribution.
The analysts said they still expected “significant medium-term payouts” from the company despite the need for restructuring capital, although the lower earnings forecasts and higher costs held sway in their decision to downgrade the stock.
They noted that RBS shares look “fairly valued” against their assumptions that the Bank of England will cut interest rates in March 2020.
In lunchtime trading on Tuesday, RBS shares were 1.7% lower at 219.9p, a 6% discount to UBS’s new target price.