UBS downgrades RBS to 'neutral' on payout uncertainty

UBS downgraded Royal Bank of Scotland to ‘neutral’ from ‘buy’ and cut the price target to 250p from 310p, pointing to significant payout uncertainty.

UBS said first-quarter adjusted pre-tax profit of RBS’s ongoing businesses beat its estimates by 16%, with all meaningful divisions overall more profitable than it had expected.

It noted that even challenged CIB turned in a smaller loss than it had estimated.

UBS said it sees broadly as much surplus capital as before. It said that despite providing for £11bn in losses and charges between 2016 and 2020 for non-core run-down, restructuring costs and legacy liabilities, it expects RBS to have the capacity to return 40% of market cap over three years.

“But despite a core bank which is outperforming our expectations and mostly composed of businesses we think attractive, the risks on the timing of capital returns are now too significant for us to maintain a buy,” UBS said.

UBS said that without the return of surplus capital in the nearer term, RBS looks fair value, trading at 0.7x tangible net asset value for a 6-7% return on tangible equity.

“Though our 2018-2020 dividend yield estimates are well over 10%, the higher risks attaching to these later payments, and greater concerns around capital tied up in the ongoing bank are the key drivers of a fall in our sum of the parts-derived target price to 250p from 310p.”

At 1100 BST, RBS shares were down 3.4% to 222.10p.