Citigroup analyst Tom Rayner has upped his price target on RBS to reflect the firm’s progress on deleveraging its balance sheet as well as a reading on its non-performing loans that wasn’t as bad as many expected. This would appear to support Tom Brown’s contention that, at many banks, the worst is over.
RBS is making steady progress towards its goal of reducing leverage, boosting capital ratios, and integrating the new businesses. Although our estimates now reflect an outcome where RBS Insurance is retained rather than sold, we show the Equity Tier 1 ratio still reaching 6.2% by 2009E. Capital strength in the face of weaker economic growth arguably remains the key risk for the group to manage over the next 12 months.
Non-performing loans at RBS increased 15% year-over-year in the first half of 2008. This was better than many had hoped, and Rayner is running with it:
Given the economic downturn and RBS’ exposure to commercial real estate and US mortgages, we believe the 15% annualised rise in non-performing loans in 1H08 was encouraging. We still expect this to deteriorate over the next couple of years but already reflect this in our loan impairment estimates which we forecast to rise from £2bn in 2007 to £5bn in 2009E.
Rayner reiterates his Buy/Medium Risk rating.
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