Royal Bank of Scotland Group PLC (LON:RBS) was upgraded by UBS as it looked ahead to UK bank earnings season, which will provide some answers about how the sector is coping with the massive shock from the coronavirus pandemic.
While the Office for Budget Responsibility has proffered a “scenario” where UK gross domestic product shrinks 35% in the second quarter, the UBS analysts said they “think it right investors first look to less levered sectors for bounce-back gearing”.
Forecasts by the analysts show the UK banks start “beginning of the beginning” of the coronavirus cycle in a much stronger position to absorb impairments than in the global financial conference before needing to issue any equity.
“Unless the UK lockdown persists beyond mid 2020 (or is repeated) and UK fiscal measures fail to gain traction, we believe that P&L pressure can be managed broadly against net revenue profit generation,” they said in a note on Tuesday.
However, the analysts said there could be “material” pressure on CET1 capital ratios from growth in risk-weighted assets in the near term and admitted they were “watchful of sovereign risks as potential source of market instability”.
If capital levels are adequate, the analysts said the “biggest” longer term issue was how banks’ revenues hold up in a lower yield environment, with the sector having “a distinctly mixed track record in this area” since the financial crisis.
With RBS’s market cap having fallen below £13bn despite it holding £5.4bn in capital above management’s 14% 2019 year-end target, the analysts upped their rating to ‘buy’ despite cutting their target price to 150p from 215p.
Share price targets were cut across the sector, but with the analysts keeping several buy recommendations, including on Virgin Money PLC (LON:VMUK), where the target price was cut to 170p from 220p, offering the most potential upside in the sector versus its last close price of 76p.
The analysts were ‘neutral’ on the rest of the sector, with HSBC PLC (LON:HSBA) getting a target price cut to 450p from 530p; Standard Chartered PLC (LON:STAN) trimmed to 460p from 590p; and Close Brothers Group PLC (LON:CBG) lowered to 1,240p from 1,445p.