Interactive Investor

RBS shares tumble after government dumps stake

7th June 2018 10:42

Graeme Evans from interactive investor

Whatever your view of the government's controversial, loss-making sale of shares in The Royal Bank of Scotland Group, there's no doubting that the move is a hugely significant moment for followers of the UK banking sector.

Like its former taxpayer-owned cousin Lloyds Banking Group, RBS shares have continued to be met with scepticism in the City, despite the pair's undoubted turnaround progress and improving dividend prospects.

The majority of brokers remain neutral on RBS, which probably comes as no great surprise given that 62% is still in the hands of the Treasury even after a share placing at a price of 271p each.

But there are notable pockets of support, including from leading fund manager Neil Woodford after he started investing in RBS in 2017.

Source: interactive investor        Past performance is not a guide to future performance

And only last week, Berenberg upped its target price from 300p to 340p as the broker questioned whether the market was discounting the potential for big buybacks stemming from the £5 billion of excess capital sitting on RBS books. It currently expects a 15p dividend for 2018 rising to 25p in 2019.

The problem for RBS investors is that there have been many false dawns in relation to a potential share price recovery. Back in 2009, RBS shares were trading above 500p until optimism was buried by a wave of conduct and restructuring costs.

Investec Securities analysts Ian Gordon pointed out yesterday that the "days of a 500p share price are long gone".

The chances of a much higher price are likely to rest on how quickly the government reduces its stake. Many analysts think that it is possible the holding could be offloaded in full by 2023. However, the fact that the Treasury was prepared to sell a 7.7% tranche at a £2.1 billion loss won't do much to make the stock any more attractive in the short term.

What has been hugely significant in recent weeks is the long-awaited $4.9 billion (£3.6 billion) settlement with the Department of Justice in relation to the bank's sale of risky mortgage-backed products in the run-up to the financial crisis.

Chief executive Ross McEwan called it a milestone moment for the bank as the agreement removed the last major legacy issue hanging over the Natwest owner.

Until the fine, it had been impossible to place an accurate valuation on the bank.

Having seen Lloyds return to the dividend fold in 2014, RBS will now be looking for the green light from the Prudential Regulation Authority to restart payments after a decade-long absence.

In the meantime, the bank will continue its focus on delivering material cost savings and risk-focused revenue growth.

The recent first quarter results showed progress on this front and helped to remind investors that RBS can no longer be considered a financial basket case.

Rising income and falling costs were among the positives, while the bank's capital cushion has improved further, and the NatWest Markets division also showed it was making a worthwhile contribution.

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