New target price for Royal Bank of Scotland

Royal Bank of Scotland publishes first-quarter results on 30 April, but Numis Securities analyst Mike Trippitt has jumped the gun and upgraded both his rating and target price on the taxpayer-owned bank.

RBS shares have been terrible performers since the bank announced in February a seventh year of heavy reported losses. It missed City estimates, too, and a sell-off had the stock down about 18% inside a month.

They've risen slightly since, but Trippitt reckons there's much more to come. "Long-distance vision is required, however the combination of 0.91x 2014 TNAV [tangible net asset value], continued improvements in operating trends and the potential excess capital position, now makes the risk-reward for RBS Group quite favourable."

Trippett upgrades his rating to 'add' from 'hold' and hikes the target price from 370p to 400p, implying 13% potential upside from current levels.

A core valuation of 316p is based on a forecast 2019 return on "required" equity of 12.7%, and assumes 1.8% growth and a blended 9.7% cost of equity. Numis estimates RBS's required equity will be £43.6 billion versus forecast equity of £58.7 billion, giving potential surplus capital of £15 billion. Discounted back to present value, that's worth 79p per share.

Improving trends at Ulster Bank are key, too. Cumulative losses there are about £3.1 billion. However, "the recent gradual run-down in risk weighted assets and notional capital release means Ulster Bank has become capital generative on a quarterly basis, and very recently on a cumulative basis," says Trippett. A rising net interest margin and steady reduction in the loan impairment charge has also driven a stronger quarterly operating performance.

However, the broker does admit that restructuring charges - estimated at £5.8 billion for 2015-18 - about £1.2 billion of forecast Dividend Access Share payment, and potential Federal Housing Finance Agency fine - potentially £5 billion for 2015 - "all cloud the investment case. They also require a long term view to be taken of potential profitability."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.