Jefferies released a research report today, March 24th, reiterating their Buy rating on Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS), and highlighting that RBS stands to benefit the most from possible interest rate increases over the next few quarters.
Analysts Joseph Dickerson and colleagues summarize their perspective in the overview of the report. “We researched UK bank’s sensitivity to rising rates and conclude that RBS is most asset sensitive with a prospective 11% uplift to ’16E PBT from a +100bps movement across the curve. Recent Fed action and resultant break-out of US regional banks suggest now is a great time to IPO Citizens.”
Increasing possibility for UK rate hikes
The Jefferies report points to both the continuing taper and impending rate hikes by the U.S. Fed as well as the recent comments by the Bank of England governor as auguring interest rate increases in the not too distant future. “Given recent actions by the US Federal Reserve and the resultant increased expectations for rate hikes in that country, combined with vaguely hawkish comments of late from Bank of England governor Mark Carney (see, for example, his speech of 18 March), we thought it useful to present a high level view of UK banks exposure to rising rates.”
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Royal Bank of Scotland: UK bank interest rate sensitivity screening
Dickerson et al highlight the Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) as the most interest rate-sensitive bank and Barclays PLC (NYSE:BCS) (LON:BARC) as the least sensitive. “All of the listed UK banks screen as at least modestly asset sensitive. As the benefit to net interest income would likely fall directly through to the bottom line, we looked at the net interest income benefit as a proportion of pre-tax income (before below-the-line items such as restructuring/litigation charges etc). On this basis, RBS is the most asset sensitive, with a prospective 11% 2016 pre-tax profit uplift due to +100bps shift in its yield curve (8% excluding Citizens); Barclays screens least sensitive on this basis (see Exhibit on next page).”
Strengthens the bull case of Royal Bank of Scotland
The analysts conclude their “Flash Note” on the Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) by arguing that the RBS sensitivity to interest rate increases further bolsters their positive outlook for the stock. They also argue the current environment is an ideal environment to IPO their Citizens Bank division.
“RBS is a high conviction BUY call predicated on balance sheet optionality – driven by an expected £8bn of excess capital in 2016 and the prospect for write-backs out of the large stock of loss reserves, in addition to £50bn + of re-deployable excess liquidity and an 88% loan/deposit ratio in the UK. There is also further capital to be released to the extent that Citizens can be floated at a premium to tangible book in H2 14. Given the +12% move in the KRE (US regional banks) index over the past month, we would argue that now is a very good time to float this business. We reiterate our BUY stance on RBS and 414p price target.”