Berenberg stays at 'buy' on RBS, says capital return potential 'undervalued'

RBS's third quarter results served as a reminder that the lender's transformation remained incomplete, but so too the prospects for the lender's capital distribution plans were still undervalued, analysts at Berenberg said.

The main thorn that was left to trim was RBS's NatWest Markets unit, they said, but "reassuringly" management was clear that subtantial change was needed.

"While full disposals are unlikely, we believe substantial change is possible. In our view, cost and RWA cuts similar to the c50% and c40% reductions during the past three years should not be ruled out," analyst Peter Richardson wrote in a research note sent to clients.

On the upside, while the erosion of RBS's net interest margin would persist, the pace was set to slow, Richardson said.

To back up his arguments, Richardson pointed to the widening in mortgage spreads, to over 100 basis points, versus 80-100 basis points over the preceding quarters, and a trough in Gilt yields meant that "hedge reinvestment yields have recovered to c70bp, from c45bp previously".

As well, volume growth in mortgages offset margin pressure during the third quarter.

Furthermore, RBS's cost-cutting plan remained on track.

"With cost reductions on track and signs that margin pressure may abate, we believe RBS can deliver a c10% RoTE and distribute c30% of its market cap before the end of 2021. Trading on 7.9x our FY20 EPS, we believe these returns remain undervalued."

Richardson reiterated his 'buy' recommendation and 220.0p target price for the shares.