Analysts say RBS's new plans bring dividend closer, lift earnings potential

If Royal Bank of Scotland retains the Williams & Glyn business, as proposed, it will bring a return to dividends closer and lift earnings in 2019, according to analysts at Morgan Stanley, JP Morgan Cazenove and others on Monday.

RBS confirmed on Monday the statement it released late on Friday, that as it could not sell its Williams & Glyn business it will instead set up a fund to help challenger banks at an estimated cost of £750m that will be taken in this coming Friday's 2016 results.

The plan has been proposed by the Treasury to the European Commission in order to allow RBS to satisfy the remaining State Aid obligations from its 2008 state bailout.

Morgan Stanley said retaining the 300 W&G branches could add around 10% to earnings per share by 2019.

"If the new set of measures is adopted then RBS has a path to clearing one of three remaining hurdles to eventual return of capital," analysts said, with the settlement of US residential mortgage-backed security (RMBS) and a clean stress test being the other two that still remain.

JP Morgan Cazenove said the new proposal as helpful for RBS but potentially disappointing for banks which might have benefitted from a forced sale of W&G, such as CYBG.

Cazenove's upgraded its 2019 estimated EPS by 12% but forecasts a 100 basis-point hit to the bank's tier-one capital levels.

Together this results in the price target being lifted to 210p from 185p, which still results in 13% downside from current levels.

Analysts at UBS saw the proposal as a positive for RBS as it could bring forward its ability to pay dividends.

Although UBS felt EC acceptance of the new proposals was "not a foregone conclusion", the proposals remove the technically challenging task of transferring W&G and should make the State Aid requirements less risky for shareholders.

"The State Aid task and the outstanding RMBS litigation issue are, in our view, the two remaining impediments to restarting dividends."

The analysts said that although the additional £750m charge will make for a bigger loss, they had already expected more than £600m on sale losses for W&G as well as significant associated restructuring charges.

Broker Shore Capital said that it was a "messy solution", but felt the changes with the EC "should be largely procedural".

Noting that the £750m charge was equivalent to circa 6p per share, ShoreCap analyst Gary Greenwood said removing the W&G uncertainty "would seem like good news for RBS investors" and not only could see RBS recommence paying dividends but also bring the UK government closer to selling off more of its 72% stake.

"In addition, the group will get to retain the ongoing earnings generation of Williams & Glyn’s branch network and customers, to the extent that these are not lost as a result of the new package of measures designed to boost competition," he said, though the exact details of how the new package of measure will work are somewhat limited.

Analyst Neil Wilson at ETX Capital said the looming US fine of around $13bn for mis-selling RMBS, for which RBS has so far set aside over $8bn to cover the cost, may delay "any chance of profits by another year".

"If the Department of Justice agrees to anything less than $10bn there will be cheers all round for RBS executives and profits could feasibly return – as [CEO Ross] McEwan hopes – by 2018."