Sir Fred Goodwin must be mighty relieved that Royal Bank of Scotland grasped the rights issue nettle when it did. Admidst the wreckage of the UK banking sector he now enjoys clear first mover advantage.
The level of April’s cash call pricing, 225p, was first surrendered a month ago. But after an aggressive sell-off on Monday, RBS shares are now more than 12 percent adrift of the price at which the bank raised £12bn.
The reason? An aggressive note on Monday from Simon Pilkington at JPMorgan Cazenove, slapping an “underperform” rating on the stock.
The analyst notes that RBS, with a loan book of £176bn, is more exposed than its domestic peers to a UK slowdown. Also, impairments to date have been relatively low and - putting RBS on a level with Barclays - Pilkington reckons the charge will rise by almost £3bn through to 2010, slicing 12p off earnings.
The really worrying bit:
We reflect a weaker economic outlook, but not a full recession. A return to a ‘1992 scenario’ would cut earnings by a further 17p or 54%.
And then there is ABN:
ABN represents one third of the balance sheet of RBS yet it will add just 1% to EPS by 2010E, on our estimates. It is not the prospect of a dismal return on investment of 7% that is our main concern. The large balance sheet has the curious characteristics of a high income yield, but a low risk weighting for regulatory capital, which we do not regard as sustainable.
If successful, the disposals would lift core tier 1 to 6.5%. There is uncertainty over the quantum, but broadly we expect the pro cyclical effects of Basel II to keep the ratio closer to 6%.
We expect the disposals to dilute EPS by 11% leaving RBS at a 30% premium on PER 2009E. The price/book at 1.2x is low and, in equilibrium, could be justified by the expected return of 13% in 2009E. In common with the sector, we see the risks to estimates still lie to the downside but, given its exposures, feel that the newly gained premium valuation of RBS will erode. We change our recommendation to UNDERPERFORM (from In Line).
Related links
RBS defies share price concerns in rights issue - FT story
