Analysts at Morgan Stanley have hiked their price target for Royal Bank of Scotland Group PLC (LON:RBS) in the wake of the UK lender’s US$4.9bn settlement with the US Department of Justice last month.
RBS was ordered to pay the sum, which was lower than what many had expected, for the sale of financial products linked to risky US mortgages in the run-up to the 2008 financial crisis.
“Post DoJ we see more room for RBS to improve its capital structure reducing funding costs and increasing shareholder returns via share buybacks/special dividend,” wrote Alvaro Serrano and his team in a note to clients.
The analysts at the ‘bulge bracket’ investment bank estimate a shareholder return of 23% - through dividends, special dividends and £2bn of share buybacks - over the next couple of years given RBS’s relatively strong financial position.
“With 16.4% CET1 (measure of a bank’s financial strength) 2018E vs. our estimated steady state of 13.5%, we believe RBS would be able to pay out at least 100% of earnings in 2019/2020E once it passes the stress test.”
Serrano and co. add that RBS is their “preferred UK domestic name”, trading on 9x adjusted earnings compared with a sector average of 11.7x, while offering “one of the highest shareholder return profiles in Europe”.
They upped their price target to 335p (from 315p) and maintained their ‘overweight’ rating on the stock.
In afternoon trade, RBS shares were broadly flat at 256.5p.