Market Report: RBS leads the Footsie as bulls sniff gains

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The Independent Online

The Royal Bank of Scotland (RBS) was the only story in town last night, touching a session high above the Treasury's buy-in price as traders eyed the potential for a doubling of the share price.

The stock, which closed 2.35p ahead 48.3p, swung a high of 50.1p, up 9 per cent, at one point, briefly putting the taxpayer's stake, bought at an average price of 49.9p per share, in the black. The gains came courtesy of Bank of America Merrill Lynch, whose analysts, factoring in new earnings forecasts and the potential value of the disposals required by EU regulators, said the state-backed lender could see its shares double on a two-year view.

"While it is still relatively early days in the restructuring of RBS, we think that the 2009 results marked an inflection point and that the earnings power and surplus capital will become increasingly apparent as we move through 2010 and into 2011," the broker said, adding that its sum-of-the-parts analysis bears a valuation estimate of 89p per share for 2012, suggesting that the taxpayer may be in line for a handsome profit.

With the election around the corner, Merrill also dealt with the potential sale of the Government's stake, saying that while the market may initially focus on the possibility of an exit and its impact on the share price, attention will eventually revert to the underlying investment case.

"We believe that the market will begin to look through the ownership and focus on fundamental valuation, in the same way that investors in Citigroup have begun to consider its valuation and stock price," Merrill said, pointing out that Citi currently trades at around $4.93 per share, against the US government's average buy-in price of $3.25.

Overall, the FTSE 100, down 81.05 points at 5,743.96, was knocked off course by weakness in the mining and, apart from RBS, banking sectors, while the FTSE 250 fell to 10,447.83, down 91.32 points. The banks were broadly firm in early trading, but news that the Securities and Exchange Commission, the US market regulator, was charging Wall Street giant Goldman Sachs with fraud in structuring and marketing a complex subprime mortgage-related product prompted a turnaround as American indices came under pressure. Barclays, for instance, went from a session high of 394.25p, up nearly 3 per cent, to 373.35p, down 9.8p, at the close;Lloyds, which touched a high of 67.1p, up more than 2 per cent, was 0.72p lower at 64.7p at the end of play.

The miners were unsettled by overnight unemployment data from the US, with the latest weekly jobless figures re-igniting concerns about the strength of the recovery. The worries supplemented earlier concerns about the pace of growth in China, whose performance in the first quarter sparked fears about the prospect of tighter monetary policy. Xstrata was among the weakest, shedding 56.5p to 1,236.5p as metals prices eased, while Antofagasta lost 39p to 1,000p and Rio Tinto fell to 3,800p, down 153p. The Eurasian Natural Resources Corporation also eased by 26p to 1,206p.

Elsewhere, the London Docklands Light Railway operator Serco was 7p ahead at 627.5p after Credit Suisse hopped on, initiating coverage with an "outperform" stance. Though positive on Serco, the broker expressed a preference for the outsourcing group Capita, pointing out that the latter's shares, which rose by 14p to 810p, have been relative underperformers over the past year as healthier end markets helped Serco pull ahead. That may change, however, as Capita's markets improve. Credit Suisse added: "Capita's shares have outperformed when its markets have subsequently picked up and growth has reaccelerated".

Further afield, UBS supported CSR, the chip maker which added 13.9p to 451.9p after the broker told clients to "buy", citing the opportunity in the rapidly growing smartphone market. UBS also played down the risks attached to the Broadcom patent litigation in the US, criticising the underperformance in the company's shares after CSR lost an appeal in the case earlier this week.

"While extremely difficult to asses, our sensitivity work shows a penalty payment of $13 to $50m, or 1 to 3 per cent of the value of CSR," the broker said. "Given CSR has underperformed the semiconductors index by 6 per cent since the announcement, we feel this is overdone."

The marketing group Aegis was slightly lower, easing by 0.8p to 133.7p, as the weakness in the wider market offset the impact of some words of support from Goldman Sachs. The broker reiterated its "buy" view in a sector review, saying that after a recent run of weakness, Aegis was once again trading at the bottom end of the sector.

Turning to the sector in general, the broker said that though March was a soft month for new business activity for the marketing and advertising agency groups, the overall picture remained on the mend.

Goldman also supported ITV, which touched a 52-week high before easing to 67.6p, down 0.4p after the broker reiterated its positive stance in a media sector round-up, pointing to signs of a stronger-than-expected recovery in advertising.