The FTSE 100 was up 25 points at 5437.8 at 12.07pm today. The Royal Bank of Scotland was the worst off on the benchmark index, down 9.35p at 196.9p, after Cazenove downgraded the stock to “underperform” from “in-line”. The broker also reduced its earning per share estimates by 12 per cent for 2009 and 24 per cent for 2010, citing higher corporate impairment.
"We see two risks that distinguish RBS from its peers: the exposure to weakening corporate credit quality and the uncertainties from the acquired ABN balance sheet," the broker said, adding:
"RBS is more exposed than its domestic peers to the UK corporate sector by the size of its loan book (£167bn) and the starting point of a low impairment charge. We expect the charge to rise by £2.9bn over the four years to 2010, reducing EPS by 12p. Our assumption for impairment is consistent with Barclays and a little below HBOS. We reflect a weaker economic outlook, but not a full recession. A return to a '1992 scenario' would cut earnings by a further 17p or 54 per cent."
"ABN represents one-third of the balance sheet of RBS yet it will add just 1 per cent to EPS by 2010E, on our estimates. It is not the prospect of a dismal return on investment of 7 per cent that is our main concern. The large balance sheet has the curious characteristics of a high income yield, but a low risk weighting for regulatory capital, which we do not regard as sustainable."
At the other end of the FTSE 100, positive broker comment took Carphone Warehouse to first place, up 8.7p at 187.7p. Goldman Sachs re-initiated coverage on the stock following the completion of the sale of 50 per cent of its distribution business to Best Buy.
"We rate CPW a Buy with a 12-month price target of 251p, offering 40 per cent potential upside," the broker said, adding:
"The first quarter trading update is due on July 31; we expect the tone to be cautious on top-line growth prospects in light of further macro deterioration in the UK. The Tiscali auction process is reportedly ongoing – we do not believe that CPW management will destroy value with a high bid and regard a potential deal at a sensible valuation as making industrial sense and see scope for considerable synergies. If CPW do not bid in, or fail to win, the auction for Tiscali UK, there may be scope for a capital return given the net cash of £170m on balance sheet post the Best Buy deal."
AMEC, up 21p at 907p, was also firm thanks to Citigroup, whose analysts upgraded the stock to "buy" from "hold".
"[The] outlook is positive across the board," Citi said, adding:
"The Natural Resources division stands to benefit from the extended capex growth cycle for the oil & gas and mining sectors. Power & Process should benefit from growth in global energy demand, ageing infrastructure re-development and the potential nuclear renaissance. Earth and Environmental should gain from growth public environment awareness, as a well as stricted legislative frameworks across the globe."
Bradford & Bingley continued to trade down and was weaker by 6.75p at 43.25p after Pali International downgraded the stock to "sell" with a – wait for it – 0p target price.
"We believe deposit-holders' money is safe, but from a equity shareholder perspective, we believe that the investment is unattractive on a risk/reward basis. An embedded-value type approach (with admittedly pessimistic assumptions on margins and cumulative write-offs) suggests a net present value of -14p on a stand-alone basis," said Pali.
In the wider banking sector, Barclays was down 1.5p at 277.5p, below the 282p per share price at which new investors have agreed to inject cash in to the bank.
Also on the downside, house builders were hit by negative comment from Merrill Lynch.
"We reiterate out view that if the industry's 1990s experience is repeated then round of write-downs will be inadequate and against a backdrop of falling house prices we anticipate that both Taylor Wimpey and the wider industry will need to re-visit land values on a regular basis over the next 18-24 months," said Merrill, sending Taylor Wimpey down by 1p to 30.75p. Barratt Developments lost 1p to 41.25p and Bellway was weaker by 27.25p at 392.5pReuse content