Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) (AMS:RBS) gets a Buy rating from Jefferies with the price target set at 390 p, up from the current 317.40 p.

RBS

Joseph Dickerson and the team at Jefferies anticipate the pre-tax operating profit of Royal Bank of Scotland Group would move up 6 percent thanks to lower cost and higher NIM in commercial banking.

RBS’ i-bank’s earnings understated after trimming deadwood

As reported earlier, Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) (AMS:RBS) has seen its core business profits fall 17 percent so far this year as the company continues to deleverage. The bank is under heavy pressure to focus on consumer and corporate banking instead of investment banking and is still facing the possibility of a government mandated breakup.

However, Joseph Dickerson and the team at Jefferies term the i-bank’s earnings power as understated, as the analysts feel the bank has good opportunity for fixed cost improvement.

Jefferies analysts feel though investors seem disappointed by the bank’s Markets business, the analysts consider the revenue trends as better than anticipated. The analysts feel the bank’s FICC revenues compare favorably on both QoQ and YoY basis.

The analysts complement the Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) (AMS:RBS)’ management for identifying c£12bn of ‘deadwood’ Basel 3 Risk Weighted Assets. Royal Bank of Scotland Group management anticipates the right-sized business to generate over £1 billion of pre-tax profit in 2015.

Scope for NIM improvement

Considering Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) (AMS:RBS)’ loan to deposit ratio of its core business stands at 88 percent, Jefferies analysts feel there is ample scope for posting improved NIM on the back of improved deposit pricing. The analysts zeroed in on the bank’s core UK corporate business as the likely candidate for improved pricing. The analysts have been surprised by the bank’s showing 5 bps improvement in NIM in the last quarter. Hence, the Jefferies analysts have added up an additional 5 bps to their estimates for the rest of year.

Enthused by Royal Bank of Scotland performance in running down its non-core business assets, Jefferies analysts anticipate the banking group will surpass expectations for the year-end non-core assets of £36-38 billion. The analysts point out the bulk of their 2015 pre-tax profit upgrade to accrue from the bank’s core business.

Dividend in 2015

Jefferies analysts believe Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) (AMS:RBS) will be able to pay a dividend in 2015, with anticipated 40 percent payout from their 2014 earnings, translating to 12 p per share.

The analysts, however, caution their estimates could be hampered in case Royal Bank of Scotland’s management fails to deliver on its restructuring initiatives. Jefferies analysts also point out the group faces political risk as the government owns a majority stake in Royal Bank of Scotland.