Royal Bank of Scotland Group Plc (RBS)

Royal Bank of Scotland (RBS) is a provider of financial products and services in the UK and Abroad. RBS has many brands under its name such as Child & Co., Coutts, NatWest, Lombard, Holt’s etc. and few are even older than the Royal Bank itself. The company's operations are differentiated in four operating segments: Personal & Business Banking (PBB), Commercial & Private Banking (CPB), RBS International (RBSI), and NatWest Markets. Harris Associates LP, Norges Bank Investment Management and Artisan Partners LP are the major shareholders in the bank.

Interim Statement – (Q1 FY19, £ mn)
On a quarter-on-quarter basis, reported operating profit before tax surged by £441 mn to £1,013 mn, however, on a YoY basis, operating profit before tax declined to £1,013 mn against £1,213 mn a year-ago, primarily on account of £265 mn lower Income and partially balanced by £73 mn lower operating expenses. Attributed profit to the ordinary shareholders stood at £707 mn from £808 mn in Q1 FY18.  Net Interest Margin for the period narrowed to 1.89% from 2.04% a year ago. Cost-to-income ratio stood at 63.4% against 60.5% in Q1 FY18. Basic earnings per share narrowed marginally to 5.9 pence per share against 6.8 pence per share recorded in Q1 FY18.

During the first quarter of FY19, return on tangible equity stood at 8.3% as compared with 9.4% in the first quarter of 2018. On a YoY basis, Common Equity Tier-1 (CET1) Capital ratio stood at 16.2% against 16.4% in a year-ago period.

Stock Performance

Daily Price Chart (as on May 28, 2019), before the market close. (Source: Thomson Reuters)

At the time of writing (as on May 28, 2019, at 01:40 PM GMT), shares of RBS were quoting at GBX 216.6 and trading marginally lower against the previous closing price. Shares have touched a 52w high of GBX 279.85 and a 52w low of GBX 194.44. The outstanding market capitalisation of the bank stood at £26.27 bn, which ranks it among the large-cap stock listed on the LSE, and the dividend yield of the bank stood at 2.54%.

Valuation Methodology


Conclusion
Royal Bank of Scotland Group PLC is the United Kingdom's 3rd largest bank by market cap. Earning yield of the bank stood at 5.8%, which was 6.23 times of the 10-year UK bond yield of 0.93. The price-to-book ratio of 0.57 lower than the average of 0.75 for the banking sector, which indicates that stocks of RBS are currently available at a lower price against the peers, in terms of Price-to-book ratio.

During the first quarter of 2019, the banking group has recorded a Net Interest Margin of 1.89%, which was around 13bps higher against the industry average, which reflects competitive edge of the company in the banking arena. In the Q1 FY19 period, Tier-1 Capital ratio stood at 16.2%, which was around 200 bps higher against the industry median.

Based on the above rationale and valuation done using the above methodology, we have given a “Buy” recommendation on the stock at the closing price of GBX 216.70 (as on May 24, 2019) with single-digit upside potential, based on the 12x NTM Industry Median Price-to-Earnings Multiple (approx.) on the FY19E Earnings Per Share.

*The “Buy” recommendation is also valid at the current price as on May-28-2019.

Metro Bank Plc (MTRO)

London-headquartered Metro Bank Plc is engaged in the business of banking and related services. The group provides business and personal banking services. The bank is primarily focused on catering retail customers and small and medium-size corporations. National Financial Services LLC (Broker), The Vanguard Group, Inc. and Ruane, Cunniff & Goldfarb LP are the major shareholders in the bank.

Recent News
On May 17, 2019, the banking group announced that it has successfully raised around £375 mn through its share placing, which was exercised on May 16, 2019. Existing and new investors shown a strong demand for the stock, which was issued at GBX 500 per share.

1^st Quarter Results for FY19 (£ mn)
During the quarter ended March 31, 2019, the group reported growth of 97,000 in customers account against 88,000 recorded in a year-ago period. Total customers account as on March 31, 2019, stood at 1.7 mn. During the first quarter of FY19, personal current account recorded an increase of 24% against the previous year and commercial current account expanded by 23% on a YoY basis. Total deposits during the Q1 FY19 period registered a growth of 19% to £15.1 bn against the corresponding period of the previous year. However, on a Q-o-Q basis, deposits impacted on account of adverse January's trading update.

On a YoY basis, advances grew by 38% to £15.2 bn, and on a Q-o-Q basis, loan book grew by £0.9 bn. During the first quarter of FY19, loan to deposit ratio increased to 100% against 91% in the same period of the previous financial year.

Underlying pre-tax profit stood at £6.9 mn against £10.0 mn in Q1 FY18, and statutory pre-tax profit stood at £4.3 mn against £8.6 mn in a year-ago. Recorded underlying earnings per share stood at 5.1 pence against 7.2 pence marked a year-ago period.

Stock Performance

Daily Price Chart (as on May 28, 2019), before the market close. (Source: Thomson Reuters)

At the time of writing (as on May 28, 2019, at 12:07 PM GMT), shares of MTRO were quoting at GBX 791.0 and added 39 points or 5.1 per cent against the previous closing price. During the past one-year, shares have touched a 52w high of GBX 3,512 and a 52w low of GBX 474.5, and at the current market price, the stock was trading considerably below the 52w high price level. From the exponential moving average standpoint (EMA), shares were trading substantially below the 200-day EMA, which is a bearish indication for a stock.

Conclusion
Post reporting an accounting scandal in January this year, the group’s brand reputation has taken a knock. In the annual general meeting held on May 21, 2019, the large shareholders in the bank based out in the US threw its weight behind the Vernon Hill, the founder and chairman of the Metro Bank. However, cash injection through share placement has pushed the stock price to GBX 791 from GBX 536.5 on the eve of share placement day.

Despite cash injection of £375 mn, which will bring Metro's tier-1 capital ratio to 15.6 per cent, a 5% above the regulatory threshold level, but overall growth depends upon the lender's strategy and corporate governance. During the AGM, around 28% of the votes were cast against the re-election of Mr Stuart Bernau and Gene Lockhart, that signals that shareholders trusts have been jolted significantly.

Also, we assume that interest margins could be narrowed in the coming days, as cost-of-capital for the bank could rise because of jolted sentiments of the stakeholders. Therefore, based on the above rational and assumptions, we recommend investors to keep a cautious "Watch" on the stock at the current price of GBX 791 (as on May 28, 2019, before the market close) and support from future growth catalyst needs to be evaluated at a subsequent stage.

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