Royal Bank of Scotland Group PLC - Operating with Sound Business Model and Healthy Balance Sheet Position

Royal Bank of Scotland Group PLC (LON: RBS) is a FTSE 100 Company which provides banking and financial services in the UK and globally.

Recent News
21^st May 2020:The Group made application for a block listing of forty-five million ordinary shares in respect of Employee Share Plan.

19^th May 2020: The Group completed the pricing of Senior Callable Fixed-to-Fixed Reset Rate Notes (USD 1,000,000,000 at 3.073% due 2028) and Senior Callable Fixed-to-Fixed Reset Rate Green Notes (USD 600,000,000 at 2.359% due 2024).

Interim Management Statement for First-Quarter 2020
 
(Source: Company Website)

As on 1^st May 2020, the Group reported a strong performance in the Q1 FY20 with Operating profit before tax at £519 million, CET1 ratio at 16.6% (40 bps higher than Q4 FY19), Liquidity coverage ratio at 152%, Bank net interest margin at 1.89% (4 bps lower than Q4 FY19). Further, the Group observed a surge in core income from NatWest Markets by 9.3% (Q1 FY20 versus Q1 FY19) whereas income from commercial and retail business decline by 6.5% (Q1 FY20 versus Q1 FY19). The Total net lending inclined by £13.1 billion with strong support across the commercial and retail segment.

Share Price Performance

Daily Chart as on 22^nd May 2020, after the market closed (Source: Refinitiv, Thomson Reuters)

RBS’s shares closed trading at GBX 104.15 on 22^nd May 2020, up by 0.92% against the last day closing price. Stock's 52 weeks High is GBX 265.00 and Low is GBX 100.34.

From the technical standpoint, 3 days, 9 days and 14 days relative strength index of the stock was favourable and price could rise further from the current trading level.

Valuation Methodology


Valuation Metrics

(Source: LSE)

As on 30^th April 2020, the Price/Earnings multiple of the RBS was 4.3x, which was lower as compared with the Banks industry of 12.0x, reflecting that the Company is trading at a lower multiple as compared to its peers.
 
Growth Catalysts
The Group has been continuously supporting clients, while delivering on its strategic priorities to meet the medium-term targets. Further, the Company has been progressing well to meet the full-year cost reduction target.

Conclusion
The ongoing market uncertainty and the regulatory changes are expected to impact the personal business by nearly £200 million in FY20. However, the Group is committed to cost reduction target of £250 million, which should assist them to navigating the short-term period of disruption. Led by a significant increase in lending during the first quarter, the Group expect total lending to grow by 3 per cent in FY20. Further, the Group expect the level of risk-weighted assets to stay between £185 to £190 billion range. The Group will not undertake share buy and dividends payments in FY20 to smoothly navigate the short-term period to stay strong in the long run.

Based on the decent prospects, and supported by valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 104.15 (as on 22^nd May 2020) with lower double-digit upside potential based on 0.39x NTM Price/Book Value (approx.) on FY20E Book Value Per Share (approx.).
 
Investec PLC – Resiliently Performing with a Robust Balance Sheet Position Amid the Pandemic

Investec PLC (LON: INVP) is a FTSE 250 listed specialist bank and asset manager. It serves a selective client base with various financial services and products.

Recent News
21^st May 2020: The Company made correction to the previously announced dividend as it was incorrectly stated as 149.00000 cents per preference share; however, the correct value is 149.98918 cents per preference share.  

Financial Highlights (for the year ended 31^st March 2020)

(Source: Company Website)

As on 21^st May 2020, the Company released its full-year results for FY20. The Group announced the results for asset management business as a discontinued operation since it was demerged during the year. Due to COVID-19 disruption, Company’s performance got affected and hence, the adjusted operating profit was declined by 16.8 per cent (against the previous year) and stood at £608.9 million in FY20 from £731.9 million in FY19. The financial decline was primarily brough by the weak macroeconomic factors such as Brexit and geo-political tensions. Further, the operating income (before expected credit loss impairment charges) plunged 7.5 per cent from £1,953.8 million in FY19 to £1,806.8 million in FY20. Subsequently, adjusted earnings per share tumbled 23.6 per cent to 46.5 pence in FY20 from 60.9 pence in FY2019.

Share Price Performance
 
Daily Chart as on 22^nd May 2020, after the market closed (Source: Refinitiv, Thomson Reuters)

Investec’s shares closed trading at GBX 145.15 on 22^nd May 2020, up by 5.90% against the last day closing price. Stock's 52 weeks High is 407.22 and Low is GBX 122.55.

From the technical standpoint, 3 days, 9 days and 14 days relative strength index of the stock was favourable and price could rise further from the current trading level.

Valuation Methodology


Valuation Metrics

(Source: LSE)

As on 30^th April 2020, the Price/Earnings multiple of the INVP was 3.4x, which was lower as compared with the Financial Services industry of 13.7x, reflecting that the company is trading at a lower multiple as compared to its peers.
 
Growth Catalysts
The Group’s client franchises business has shown resilience and remained flat against the previous year despite the challenging environment. Further, the Group is operating at a low leverage level with a robust balance sheet position.

Conclusion
The outlook for FY2021 appears to be volatile due to the devastating effects of COVID-19. However, the Group continues to look for opportunities and have the potential to navigate this uncertain short-term period to emerge strongly in the long run. Meanwhile, the Group is focussed on improving efficiencies and controlling costs. Moreover, the Group entered the financial year 2021 with a strong capital position and further plan to maintain a decent level of liquidity. As at 31^st March 2020, the Group reported a robust cash balance of £12.7 billion. Even the basic earnings per share grew by 121.7 per cent to 115.3 pence in FY20 from 52.0 pence in FY19. Moreover, the Company is focussed on growing clients and differentiated offerings for corporate & private clients, which should yield organic growth in future.

Based on the decent prospects, and supported by valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 145.15 (as on 22nd May 2020) with lower double-digit upside potential based on 0.36x NTM Price/Book Value (approx.) on FY21E Book Value Per Share (approx.).
 
*All forecasted figures and Peers information has been taken from Refinitiv, Thomson Reuters.
*The “Buy” recommendation is valid for the current price as covered in the report (as on 26^th May 2020).

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.