Broker snap: Goldman upgrades RBS on potential upside

Goldman Sachs has taken Royal Bank of Scotland off its 'sell' list, saying that the expected earnings dilution from potentially higher capital regulations is already priced in to the stock.The broker explained that earnings dilution risk at both RBS and Lloyds has risen over the past few months, with the Financial Policy Committee (FPC)/Financial Services Authority (FSA) looking at whether UK banks currently overstate their capital positions and if they need additional capital resources.Meanwhile, Goldman said that full-year 2012 results from both companies highlighted various corporate actions that will impact their respective capital ratios, business mix and returns in the future.Nevertheless, analysts said that the core operations of RBS and Lloyds remain positioned to generate returns that meet or exceed their cost of equity following the execution of planned actions. Furthermore, they believe that dilution risk from here is "moderate" with base-case estimates for 2013-2015 non-core losses falling; core capital ratios for both groups are expected to "gradually trend upwards" over the coming periods, the broker said.Goldman said: "While the results of the FPC/FSA capital examination exercise have yet to be released, we view the announced strategic actions at RBS as anticipating its outcome. Against this backdrop, and with the stock having underperformed the sector and the other UK banks in our coverage by 12% and 16% respectively since end-January and offering 23% upside to our revised price target, we upgrade the stock to 'neutral' from 'sell'."The target price for RBS has been raised from 340p to 360p.As for Lloyds, Goldman said that it has options to boost is loss-absorbing capacity without materially diluting earnings. The target price has been raised from 57p to 60p and a 'neutral' rating was kept.BC