RBS Takes Big Charge, But Not As Large As Expected

By Mani
Updated on

Jefferies reiterated its Buy rating on Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) despite the recent announcement of £2.9 billion of litigation and conduct charges.

Joseph Dickerson and team at Jefferies however trimmed RBS’ target price from 441.0p to 414.0p.

RBS’ £2.9 billion charge

Following its board meeting Monday, Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) made a surprising trading update that the bank is taking billions of pounds in extra charges to cover the cost of past misdeeds.

The RBS group is taking £2.9 billion of expenses comprised of: (a) £ 1.9 billion primarily related to mortgage-backed securities litigation, which follows on the back of recent settlements at other banks and regulatory decisions, (b) £ 465 million further provision for Payment Protection Insurance redress and (c) £ 500 million for Interest Rate Hedging Products redress.

Recent charge not thesis-changing

The Jefferies analysts believe the recent announcement by RBS on litigation and conduct charges are not thesis-changing.

The analysts reiterate their Buy on Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) predicated on appreciation of value in the core operations as well as extensive balance sheet optionality.

The Jefferies analysts already flagged a worse case of £4 billion of litigation risk in their November 2013 report. The analysts point out that the provision for mortgage-backed security risk now looks less than some feared. Moreover with the management now providing some numbers around litigation risks, the capital impact looks manageable and was already factored into planning around the creation of the bad bank.

In November, Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) said it intended to create an internal ‘bad bank’ which will assume £38 billion of bad and doubtful loans / assets. The bank said the action could result in a write-down of up to £4.5 billion in Q4 and adversely impact its capital adequacy ratio in the short term.

Trimmed RBS price target

By adopting sum of the parts valuation, the Jefferies analysts trimmed Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) price target from 441 p to 414 p.

The following details 20 p worth of value representing the discounted PV of capital released from the wind down of Capital Resolution, and 394 p of value for the core bank.

Accordingly, Joseph Dickerson and team at Jefferies trimmed their price target for Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) to 414 p from 441 p, which also reflects the £2.9bn charge.

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