Royal Bank of Scotland Group PLC (LON:RBS) shares fell Wednesday on the back of a downgrade from Barclays, where analysts forecast that the lender's returns will “fade”, dividends will be slow to arrive, and there is potential for major Brexit downside.
RBS was cut to an ‘underweight’ rating from ‘equal weight’, with the share price target kept at 225p.
In a note to clients, the Barclays analysts said that pressure on net interest margin (NIM) and inflation of risk-weighted assets (RWAs) is expected to weigh on RBS’s UK retail and commercial returns, while a restructuring of the underperforming NatWest Markets and Ulster businesses will “require patience” and that “significant restructuring charges are likely”.
While RBS has sustained high returns in recent years, analysis by Barclays suggests NIM headwinds “are under-appreciated”, particularly if the Bank of England cuts the base rate on 30 January.
Although mortgage risk weights, countercyclical buffer, Basel 3.1 and restructuring charges will be higher, they will be offset by a lower post-Basel CET1 ratio target and a capital release from NatWest Markets, the Barclays analysts predicted.
They suggested capital returns of “circa 30% of market cap” could be announced for 2020-2022, albeit the timing is key as is expected to be “back-end-loaded” as well as being contingent on external factors such as the propensity for the UK government’s investments arm UKGI to sell down its 62.4% stake.
A disorderly Brexit is a key part of the analysts' 130p downside case for the shares, which factors in a weaker UK macro outlook with NIM compression as rates stay lower, loans contract, higher impairments and more costly resolution of legacy items.
RBS shares were down 3% at 224.1p on Wednesday afternoon.