Bernstein bullish on RBS despite larger losses

LONDON (ShareCast) - A quick reaction note from Bernstein on Royal Bank of Scotland (LSE: RBS.L - news) praised a "strong beat" on operating expenses and lower restructuring costs than it expected, with its 'outperform' rating maintained and target price moved to 450p. The broker predicted RBS will spend roughly £9bn in litigation and restructuring over the next few years but has plenty of capacity for earning growth once the restructuring is over and interest rates normalise.

Bernstein said RBS was encouraged by performance in retail and commercial, with UK personal and private banking lifting operating profits 10% sequentially, driven by a very strong performance in operating expenditure as the £700m of restructuring spending in the business over the past two years finally comes through.

Personal (LSE: PGH.L - news) banking saw cost savings more than offset a 5% decline in income driven by a shift from unsecured to mortgages and drop in fee income, while UK commercial saw loan growth up roughly 4% - the first time in the last five years.

The broker praised the "strong beat" on operating expenses - down 15% year-on-year and 6% below consensus at £2.78bn - in "another positive sign management is driving towards their cost target".

Restructuring costs of £453m were below its expectation of £1.1bn for the quarter.

"We have felt that management's restructuring cost guidance - both on the core business and Investment Bank - has significant room for lower revisions. Q1 was one data point confirming that." Delivering its investment case, Bernstein said that once the restructuring is over and interest rates normalise the core banking franchise over the next few years is "likely to expand earnings" from the near-28p of earnings per share today to "north of 35p" .

Analysts also believe there is a further 120p or so of value that investors will recoup from deleveraging and exiting franchises such as Citizens (NYSE: CIA - news) in the US, for example, on top of roughly £9bn that Bernstein believes the bank will spend on litigation and restructuring over the next few years.