RBS (RBS) ... loading up

Friday 17th January 2014

I’ve bought a fair few shares in RBS (RBS, mkt cap £42bn) at 366p/shr. The rationale is broadly similar to that behind my purchase of Lloyds. The UK government (HMG) has an 81% stake in RBS, with a break-even level of 502p/shr. Therefore in order for a placing to occur, I reckon the price will have to be at or higher than this level. As with HMG’s break-even level in Lloyds, at 61p/shr, the chance of it taking a loss and the political/press fallout as a result would be anathema to the Treasury.

Lloyds looks as though it’s to be soon offloaded by HMG. Then the attention will likely turn more so to RBS. This will be a big juicy fee for the investment banks (IBs) and it will only really be possible if RBS’s share price is closer to the 502p mentioned above. Therefore, I’d expect the IBs to be keen to promote RBS higher.

The UK economy is seemingly on an upward path, while recent data on the Irish economy has shown improvement; allowing Ireland to borrow at the lowest spread in years. Further, RBS has begun to sell-off some of its US assets; shedding 94 branches in Chicago.

As with Lloyds, there is substantial investor underweight in RBS. When HMG decides to kick start the sale process, the free float will go up from 19%, meaning UK long only funds will have to take more notice, while tracker funds will also have to load up. The rally in Bank of Ireland, has in some part been driven by the implications of its greater weighting in several indices.

In valuation terms, while RBS may not warrant a valuation on par with Lloyds, its 46% discount on a price to book ratio is difficult to ignore. RBS currently trades at 0.67x forwad tbv (544p) as compared to both Lloyds and Bank of Ireland on 1.24x.

Technically, the shares appear to be on the verge of breaking out of a 14-month channel, which may signal a bull flag.

And another thing ... 

The trend in credit (CDS) pricing is also noteworthy. It’s fallen dramatically over recent months, to 4 year lows and has historically been a strong indicator for the path of the equity. 

UK GDP forecasts being revised higher
Source: Bloomberg

Forward price to book values
Source: Bloomberg

RBS share price
Source: Bloomberg

RBS CDS as compared to equity
Source: Bloomberg

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