Consensus underestimating potential for higher dividends from RBS, Berenberg says
Analysts at Berenberg reiterated their 'buy' stance and 340.0p target price on RBS stock despite the shares' outperformance year-to-date, arguing that there was scope for "material" capital returns of roughly 12% per year and that the lender continued to be "undervalued".
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"RBS's strength and capital return potential are becoming hard to doubt," analyst Peter Richardson said.
Notwithstanding the uncertainty in the UK, the lender was generating underlying returns of over 10%, and there was scope for costs savings to lift that to management's 12% target.
Indeed, RBS had blown past consensus estimates (and Berenberg's) for its full-year 2018 payout, delivering 13p per share.
Its ability to deliver a payout that was about 40% greater than Berenberg's already above consensus estimate underlined how "insufficient" the consensus forecasts for 2019 and 2020 were, Richardson said.
In a nutshell, markets were wrong in their perception that RBS remained a 'restructuring story'.
"While UK uncertainties persist, we take reassurance from RBS’s modest revenue growth (of c3.5%) and robust asset quality (as shown by UK stress tests)," Richardson added.
Furthermore, operating costs were seen falling by another £300m in fiscal year 2019.
The analyst went on to explain that for the first time his estimates were now anticipating share buybacks, of £1.0bn in 2019, rising to £1.5bn thereafter.
Hence, Richardson believed RBS could return about £3.8bn of capital over the next three years, while maintaining a buffer of 70 and 30 basis points in 2020 and 2021 above its common equity Tier 1 capital target of 14.0%, respectively.
"We believe RBS's ability to conduct directed buybacks can meaningfully offset headwinds from the government's stake sale," he added.