The Scotland-based bank is selling a 25% stake in its Citizens Financial Group, a mid-tier U.S. bank that operates mostly in the Northeast. The offering is set to price Tuesday night and begin trading on Wednesday. If it prices at $25 a share, the high end of the IPO range, Citizens would raise $3.5 billion, valuing the company at $14 billion. Royal Bank will own the remaining 75%.
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Twenty-one underwriters, led by Goldman Sachs and Morgan Stanley, are involved in the offering.
The $14 billion valuation translates to 18 times earnings for a 12-month period compared to 16 times trailing 12-month earnings for 20 comparable U.S. banks, according to Bloomberg data. KeyCorp (KEY) and Fifth Third Bancorp (FITB) , which compete with Citizens in some Midwestern markets and are roughly the same size and trade at 13.6 and 11.9 times earnings, respectively. Citizens is the 13th-largest U.S. bank, according to SNL Financial.
Still, a report from Spin-Off Research, a Chicago-based firm, recommends the shares with a $30 target price. It notes Citizens' plan to wring $200 million in costs out of business over the next two to three years.
The company also plans to reduce its reserves, which Spin-Off's analysts contend is high compared with peers, in order to improve returns. Like most lenders, Citizens will benefit from a rising interest rate environment, allowing it to capture a larger spread between its cost of capital and the interest it charges for loans.
Spin-Off's analysts also praise Citizens for its improving credit portfolio. "Not only have the non-performing assets declined as a percentage of total assets, the bank's net charge-offs or bad debts have declined considerably as well. Management believes that the high quality of loan portfolio will allow the company to seek more attractive, higher yielding risk-adjusted returns while maintaining appropriate risk discipline and solid asset quality," the report states.
TheStreet Ratings team rates ROYAL BANK OF SCOTLAND GROUP as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation:
"We rate ROYAL BANK OF SCOTLAND GROUP (RBS) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its increase in net income, expanding profit margins and growth in earnings per share. However, as a counter to these strengths, we also find weaknesses including disappointing return on equity and a generally disappointing performance in the stock itself."
You can view the full analysis from the report here: RBS Ratings Report
"We rate ROYAL BANK OF SCOTLAND GROUP (RBS) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its increase in net income, expanding profit margins and growth in earnings per share. However, as a counter to these strengths, we also find weaknesses including disappointing return on equity and a generally disappointing performance in the stock itself."
You can view the full analysis from the report here: RBS Ratings Report
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