Step forward Simon Pilkington, who heads the banks research team at JPMorgan Cazenove – although we should state at the outset that there’s a risk of damning with faint praise here.
Royal Bank of Scotland has fallen out of sync with its UK peers, the Caz man said in a note to clients on Thursday, which is wrong when RBS’s stronger capital position (post rights issue, obviously) “arguably warrants a premium against those that have yet to raise equity.”
By which we assume Mr Pilkington means Barclays.
But then he goes and spoils it:
Fundamentally, we believe that valuation is an insufficient reason for a turning point yet we do not sense the beginnings of a new investment case emerging for RBS; there is an absence of any sense of change in strategy, more management’s view appears to be that the rights issue and disposals address the capital position and allow the strategy to carry on unaltered. At yesterday’s closing prices, we see RBS as moderately undervalued against the peers.
Technical factors are clearly playing a part in the alarming disintegration of RBS’s market standing. Since the plan to raise £12bn was announced in mid-April, RBS stock has fallen by almost a quarter. Since the turn of the year the price is off almost 40 per cent, compared to about 13 per cent for the UK bank sector as a whole.
After a precipitous fall on Wednesday, the shares dropped another 5p to 236p during early trade on Wednesday, which left the nil paid rights at a sickly 36p. Six days ago the opportunity to participate in what promises to be the world’s largest ever rights issue – at 200p a share – cost 76p. If the nil paids go to zero, Goldman, UBS, Merrill Lynch and their unnamed sub-underwriters will get lumbered.
And the existing management, led by chief executive Sir Fred Goodwin, will be history.
For now, Mr Pilkington suspects the price is being damaged by speculative selling in anticipation of a placing of the unsubscribed rights – and the further the price falls towards the rights price of 200p, the greater the speculative temptation to sell becomes.
Says the analyst:
In our view, the rights issue has addressed one of the major concerns to give RBS a respectable, though not luxurious, equity tier 1 ratio (5.8% 08E post rights, Basel II; rises to 6.5% post disposals).
In addition to ABN, we see two outstanding issues: the sustainable earnings capability at Global Banking & Markets (GBM) and the vulnerability of the UK loan book to an economic slowdown.
Related links
Is the world’s largest rights issue in deep, deep trouble? – FT Alphaville
Save Fred campaign gets underway - FT Alphaville