Goldman Sachs raises RBS to buy recommendation

Goldman Sachs has raised its recommendation to buy for shares in state-backed bank the Royal Bank of Scotland, from neutral.

At Mansion House, it was indicated that HM Treasury intends to split Royal Bank of Scotland if the exercise: 1) does not require additional taxpayer capital; 2) supports the British economy; 3) is in the interests of taxpayers; and 4) accelerates the return to private ownership of RBS. The impact of a split on equity and debt investors is uncertain and highly dependent on the terms of any asset transfers. However, on our analysis, a split could clear each of the four Mansion House ‘hurdles’ while addressing the group’s key challenges: muted core returns and elevated uncertainty.

The stock price has risen on the news, and is currently up by around five per cent for the day.

Provisions and capital held against high risk portfolios enable RBS to potentially transfer assets to a bad bank at a 29% discount to notional without impairing the group’s regulatory capital ratios (hurdle 1);

Divesting certain US operations would allow RBS to fund further haircuts while focusing the group on its UK/real economy operations (hurdle 2);

The remaining continuing operations would generate improved ROE and operate with a lower COE, thus protecting shareholder value (hurdle 3);

The transfer of high risk assets off the RBS balance sheet would front-load steady-state, facilitating an accelerated re-privatization process (hurdle 4).

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Key risks
Worse-than-expected regulation, litigation, macro and markets.