Is this the most unconvincing bounce in UK stock market history?
Probably.
The market really has given up on RBS, with most analysts saying the equity is now not worth more than a few pennies.
Here’s Sandy Chen at Panmure Gordon:
We have, not surprisingly, cut our forecasts on RBS – we now expect negative EPS and ROICs through to 2010. Our long-term ROIC valuation model gives a negative equity valuation for 2009 and a 12p valuation for 2010; we thus cut our share price target from 40p to 5p.
We have revised our models based on the key changes being: (1) a further worsening of bad debts as the recession deepens and lengthens: and, (2) the dilution caused by the current £5bn government preference shares for equity shares swap.
While Simon Pilkington at Cazenove thinks nationalisation is all but inevitable:
The market capitalisation of Royal Bank of Scotland has fallen to £7bn including the underwritten £5bn of new equity. Assuming the new equity is left with the government, then its total £20bn injection of capital is now valued at just £5bn. Self evidently the valuation reflects an absence of confidence in the viability of the equity. The fears emanate from:
*Further losses as the loan impairment cycle tracks the rise in unemployment. Following RBS’s comments on concentration risk we have raised our estimate for future loan losses in 2009E.
*Further write-downs on credit market assets prior to the ring-fencing within the government’s proposed asset protection scheme (APS).
*The potential cost of entering the APS. In the US, the cost has been around 4% of the insured assets though the Treasury states pricing will vary with the underwriting risk.
*The pace of deterioration in capital through the final quarter of 2008 is unnerving; our estimate for 2008 was too high by 120bp.
For the next twelve months we anticipate equity tier 1 falling to 5.4%. In summary, there appears a high probability that RBS will need to raise more capital. The risk is compounded by a controlling shareholder who for political expediency may prefer nationalisation to a third injection of capital.
Of course, we all know who is to blame:
But it is always useful to put things into a bit of perspective. So here’s another graphic, illustrating the fact that RBS stock is now back at 1983 levels…
Other things that happened in 1983: the IRA bombed Harrods, McDonald’s introduced the McNugget, Return of the Jedi was released, Michael Jackson’s Thriller was broadcast for the first time, The Zapatista Army of National Liberation was founded.
Related links:
Hestrionics – FT Alphaville
The Royal Penny Dreadful (Update – trading at 10p at 14.33) – FT Alphaville