Morgan Stanley upgrades RBS, expects higher capital distributions

Analysts at Morgan Stanley upped their target price and raised their recommendation for shares of RBS in anticipation that the its chief executive, Alison Rose's, targets would result in higher topline growth in the banking unit, increase the room for cost cuts in its Markets division and reduce the lender's capital requirements.

The new targets were expected to be unveiled on 14 February.

"Focus will be on restructuring of Natwest Markets,however we also believe RBS will show improving NII growth in 2020,and will announce a lower "go to" capital target," analyst Alvaro Serrano said in a research note sent to clients.

All told, the analyst raised his estimates for the lender's earnings by between 4.0-9.0% for a greater than double-digit compound annual rate of growth in its earnings for 2019-22.

Serrano also expected RBS to raise its target for capital distributions.

"With conduct issues largely behind it, lower RWA pro-cyclically, pension deficit addressed and excess capital held in Ireland set to be repatriated, we believe RBS is in a position to lower its "go-to" CET1 from 14% to at least 13%. This will allow an additional £2bn of capital distribution equivalent to 7% of its market cap."

Changing hands on 1.0 times their estimate of its tangible book value and with a 2022 return on tangible equity of 12.0%, he therefore revised his target from 260.0p to 300.0p.

His recommendation for the shares went up from 'equalweight' to 'overweight'.