RBS Offers Investors Rising Returns on Recovery, Bernstein Says

Chart: RBS Shares

Royal Bank of Scotland Group Plc is one of the few European banks that can offer investors growing returns once it resolves litigation issues, according to Sanford C. Bernstein.

The bank has spent about 12 billion pounds ($18.8 billion) on litigation and restructuring costs and has matters to conclude including a U.S. mortgage suit and potential U.K. loan insurance charges, said Chirantan Barua, an analyst at Bernstein with an outperform rating on the stock. Even so, RBS is a “strong” bank that could trade at 450 pence a share within 12 months, he said in a note to investors on Thursday.

“Underneath the political, legal and restructuring noise is a franchise that is deeply undervalued both from a potential earnings perspective as well as the excess capital that it’s generating,” Bernstein said. “This is one of the few remaining European banks which still offer a recovery trade to investors.”

Chief Executive Officer Ross McEwan is selling assets and cutting jobs as he tries to return Britain’s biggest government-owned lender to annual profit. The U.K. cut its stake in Edinburgh-based RBS to 72.9 percent this month, raising 2.1 billion pounds. As the U.K. government reduces its holding to revive investor appetite, the bank should become “more of a mainstream investment proposition,” Bernstein wrote.

RBS gained 0.7 percent to 341.5 pence at 12:56 p.m. in London trading. The shares have declined 13 percent this year, the worst performance of a U.K. bank.

Investors should look at the “Go Forward” business that RBS plans to keep, including the U.K. consumer bank and the commercial-lending business, which account for about 80 percent of group profit, wrote the analyst. Earnings per share of those businesses will jump from 32 pence this year to 37 pence in 2017, Bernstein estimated.

Gains of about 20 percent in operating profit are expected at the RBS’s personal and business banking unit from 2014 to 2017, Bernstein said. The commercial bank may increase profit by 10 percent this year with a further 35 percent jump through 2017, helped by increased lending.

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