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The City expects big things from the new man charged with steering state-owned Royal Bank of Scotland along the road to recovery.
Stephen Hester this week agreed a pay packet worth almost £10 million, and now the City expects him to start delivering results in double quick time. Hester has a big following in the Square Mile and his appointment has not been lost on the likes of the Queen's own broker Cazenove, which has raised its rating on the shares from underperform to outperform.
It has told clients it expects the shares to react rapidly to news of the restructuring of the bank, which is 70% owned by the taxpayer. The problem of capital adequacy has already been addressed by an injection of £40 billion and a £300 billion insurance scheme.
Cazenove's Simon Pilkington says: “The RBS share price is now trading around tangible book value. We believe the valuation reflects investor confidence in the capital position.
“Further out and on a balance sheet one third smaller, the potential earnings for RBS are 6.5p, which suggests a 60p share price is achievable in time.”
The shares were today 1.17p higher at 36.73p as more than 100 million changed hands. Shares generally lost ground with investors fixed on the sidelines. The FTSE 100 index fell 35.46 to 4244.52. Wall Street rallied from opening falls despite a bigger-than-expected rise in jobless claims last week. But a revision of the GDP showed the US economy shrank less than previously thought during the first quarter. The Dow rose 54.71 to 8354.57.
Insurance broker Chaucer Holdings firmed ½p to 42¾p as Pamplona Capital Management raided the market for more shares. It bid 44p for up to 34.42 million shares this afternoon which would raise its holding from 9.99% to 16.27%. Lloyd's broker Brit Insurance, yesterday withdrew its offer of 40¼p a share for Chaucer. earlier this year Pamplona said it wanted to raise its stake in Chaucer to 29.9%.
The London Stock Exchange, up 4½p at 692p, and its biggest European rival Deutsche Börse are having a spat about the use of reduced tick sizes on the order book. That is the gap between bid and offer. The LSE last week said it would be reducing the tick in another half-dozen leading shares. It blamed growing competition from rival trading platforms, such as Turquoise, Chi-X and BATS. The argument goes that smaller tick sizes increase competition among traders, resulting in cheaper prices for investors.
But traders claim smaller tick sizes also result in increased volatility and higher costs. Take, for instance, the impact on a liquid stock, such as Vodafone, down 1.3p at 117.35p. Before the tick size was reduced from about a quarter-point, dealers could trade in two million shares at a time. The spread was later cut to 0.1p ,and these days is just 0.05p, with the maximum-size trade cut to between 50,000 and 100,000 shares. That means dealers executing a large purchase order must repeatedly go back on to the order book to complete the order and pay a premium for each transaction.
Deutsche Börse has now gone on the record as claiming that smaller tick sizes are “bad for the market”. It also warned that competition on tick sizes is “not right”.
Package holidays operator TUI Travel firmed 1.75p to 231.5p after Citigroup raised its rating from hold to buy.
UBS has picked Rio Tinto, down 40p at 2091p, as its most-preferred resources stock despite short-term selling on the back of its recent £8 billion rights issue.
The broker says: “We believe that the conclusion of the refinancing of Rio's balance sheet will represent a substantial catalyst for the stock and as a result Rio will close the valuation gap between it and rival BHP Billiton.” BHP shares fell 14p to 1381p.
Bank of America Merrill Lynch has raised its rating on Standard Life, up 2.7p at 181.5p, from neutral to buy. It also has a price target of 214p which, combined with a dividend yield of 7%, implies a total return on capital of 30%.
It has reduced its price target for Prudential, down 1p at 406¾p, from 535p to 520p, but continues to rate the shares a buy. It has tweaked its target on Old Mutual, 0.24p cheaper at 75.95p, from 65p to 70p.
