In a settlement that follows similar Libor-related fines paid by Barclays and UBS, RBS has agreed to pay the UKs Financial Services Authority (FSA) £87.5 million, and $325 million and $150 million to the USs Commodity Futures Trading Commission and Department of Justice (DoJ), to settle their investigations. In a research note, analysts at BernsteinResearch wrote: This settlement sits within market expectations, coming in between the Barclays (£290 million/$450 million) and UBS fines (£940 million/$1.5 billion). They added: Most importantly, todays announcement draws a line under the Libor saga across the regulatory bodies that supervise RBS, notably the DoJ and FSA. This is positive for the stock, as the Libor scandal had brought uncertainty due to the wide range of possible fines/settlements. Bank analysts at Deutsche Bank, which maintains its hold rating on RBSs stock, had calculated Libor-related fines of up to £500 million, but that the announced figure is substantially lower marks a minor positive for us, they wrote.
Even the departure of John Hourican, the chief executive of RBSs markets and international banking division, has failed to dent analysts optimism on RBSs share price, which BernsteinResearch analysts rate as outperform.
John had a significant role to play in RBSs restructuring of the investment bank but his departure at this stage will be less felt than say a few years back, the BernsteinResearch analysts wrote. There was significant pressure on RBS management in 2008 to do a UBS with the investment bank. However, the decision to retain it has paid rich dividends.
The unit has played its key role for which it was kept since 2008 boosting earnings (contributed to around 55% of group earnings in the past four years) and capital to the group, giving the bank the marginal capacity to write down its non-core book all when its fixed income franchise booked windfalls as central banks printed money.
However, Ian Gordon, bank analyst at Investec Securities, who maintains his long-held sell rating, said that even though they see the financial impact of Libor as relatively modest, the prospect for plumper returns on RBS stock do not look good.
Given weak (or negative) loan growth in many of its core businesses primarily a function of the weak macro backdrop we continue to see a very slow pace of recovery with, after five years of heavy losses, an RoE of 2% in 2013e, 4% in 2014e and 6% in 2015e, wrote Gordon.
Such returns do not, in our view, support the current share price, with RBS now trading on c.0.73x tNAV broadly in line with Barclays (Buy).
This, in turn, raises the perennial question of what should the UK government do with its 81% shareholding in RBS, a question that Vince Cable, business secretary, seemingly addressed on Wednesday when he resuscitated the idea of distributing shares to the UK public.
On this issue, Gordon wrote: It provides mild entertainment to hear Vince Cables discussion of a Boris Yeltsin-style distribution of free shares in RBS as a possible part of a return of RBS to the private sector. Vince appears more realistic in acknowledging that full nationalization is no longer an option and privatization is a distant concept.
Indeed, near-term, the UK governments 81% stake will probably only be reduced if the FPC forces through fresh dilution as part of its recapitalization agenda something current shareholders must fervently hope to avoid.
|John Hourican, RBSs investment banking head|