RBS being punished for sensible precautions, argues Berenberg

Royal Bank of Scotland is being penalised for its prudence, analysts at Berenberg said on Monday, reiterating their ‘buy’ rating on the British bank.

RBS said on Friday that it had set aside an extra £100m to cover any uncertainly caused by Brexit, including possible bad loans. It is the first British bank to make a specific link between Brexit and greater economic uncertainty.

The provision took the bank’s impairments for the third quarter up to £240m from £143m in the same period in 2017.

Chief executive Ross McEwan insisted that the move did not hint at any specific issue with the bank’s loan book. But shareholders were spooked, and the shares fell heavily.

But Berenberg analyst Peter Richardson said on Monday that RBS, which was bailed out by the government in 2008, was being “penalised for prudence”.

He continued: “Faced with heightened UK uncertainty, we believe RBS is pursuing a near textbook strategy.

“This has revealed a paradox. On one hand, investors are crippled by fears surrounding the possible effect of Brexit on UK banks. On the other hand, the short-term costs of strategies to mitigate the risks are being punished, not rewarded. Most notably, the temporary cost of RBS holding excess liquidity ahead of Brexit is a small price to pay relative to the cost of gathering liquidity during a period of stress.

“Moreover, while RBS’s risk-focused mortgage growth continues to drive margin pressure, marginal returns from the growth remain attractive.”

Barclays, meanwhile, said it saw “significant value” in the stock following the third-quarter numbers. “The quarter was untidy with a number of one-off items, but delivered stable underlying operating performance. Focus is on how quickly RBS can return surplus capital; we now factor special dividends in addition to directed buybacks.”

Richardson agreed, noting: “RBS has excess capital that it will return to shareholders. Whether in the form of dividends or buybacks, this capital remains undervalued. We continue to believe that RBS can distribute dividends and buybacks equal to 45% of its market cap during the next three years.”

Barclays, which has an ‘overweight’ rating on the stock, added that it still expected rising rates to provide a tailwind for the major banks.