Has RBS finally grasped the nettle?

Yesterday’s long anticipated overhaul of RBS’s investment banking arm was well received by markets.

Shares in the state-owned lender gained 5.5% in yesterday’s trading, rising by 1.21p to close at 23p in response to the restructure, which will see the firm’s investment banking arm dramatically shrink in a move to gets its business in shape for new ring-fencing rules. To facilitate this the bank will cut an additional 3,500 jobs from its register.  

The slimmer bank will focus on fixed income, foreign exchange and debt finance and quit cash equities, corporate broking, equity capital markets, and mergers and acquisitions businesses, which make up its Global Banking and Markets (GBM) business.

While RBS still has a long list of problems, with its exposure to peripheral European debt a growing concern, Seymour Pierce believe the bank has finally ‘grasped the nettle’, which should open up the potential for greater shareholder gains.

The broker - which has been advising investors to sell the bank since it initiated coverage on the firm in March 2010 - has upgraded its recommendation to buy with a 40p price target on the back of the proposals.  

While Seymour bank analyst Bruce Packard accepts this investment is not for the faint-hearted, he says those prepared to take the risk could be rewarded on the basis that the bank’s more focused strategy is likely to create value for customers and shareholders.

‘RBS remains risky, but at least now shareholders could be rewarded for the risk. The share price volatility over the past few years suggests to us that there is very little diversification benefit from the universal banking model. Instead concerns centre on funding and leverage ratios,’ Packard said. 

While Packard said he struggled to put a value on the bank’s shrinking non-core and GBM business, he put a price of [at least] 37p on its retail and commercial bank on a standalone basis and 3p on it insurance business which is soon to be floated.

‘We believe management has finally ‘grasped the nettle’ and believe the latent 40p of core value is strong enough reason to raise our recommendation to buy,’ Packard said.

‘We believe it is hard to have a “high conviction” on RBS equity, but at least now shareholders could be rewarded for the risk. The share price volatility over the past few years suggests to us that there is very little diversification benefit from the universal banking model. But it is hard to argue that this isn’t now recognised by market participants, and we believe there is value in the Core Retail and Commercial Banking business.