Equities research firm Jefferies published an investment report on Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) today. Lead equity analyst Joseph Dickerson and colleagues think that there is finally light at the end of the tunnel for RBS after six consecutive years of losses. The analysts make an argument that the stock could move up more than 20% given the multiple positive catalysts looming over the next 12 months, and rate it as a Buy.
Further cost cutting
Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) management have publicly said they are seeking a run-rate cost base of £8 billion, which implies around a 20% reduction in the underlying base. The Jefferies report highlights that RBS CEO Ross McEwan has a proven track record of delivering cost efficiencies, and they expect he will get the job done here as well.
Royal Bank of Scotland’s strong balance sheet
Dickerson et al also point out that Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) has been gradually improving their balance sheet over the last several quarters. “As part of its strategic realignment, RBS targets a 12% or greater fully loaded CET1 ratio by 2016. Our models indicate the group will deliver a 15% level by that time such that base case excess capital is £8bn. According to our calculations, the group has prospective write-backs from the stock of provisions of up to £12bn. Further, we estimate that RBS has anywhere from £20-100bn of excess liquidity that could be re-deployed into lending or other more profitable activities.”
Reduced cost of equity will lead to stock price appreciation
The main takeaway in the Jefferies report is that all of these factors add up to a significant improvement in Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS)’s cost of equity, and that improvement in this key metric could lead to a big move in the stock. “We believe that by delivering on the above and focusing investors on the UK centricity of the bank (a name change may be required to drive a change in perceptions for both customers and investors), that the cost of equity (Ke) could fall from the current estimated 10.5% to 9% (the current implied Ke at LLOY). Stand alone, this would drive our base case price target 21% higher.”
