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Royal Bank of Scotland rises as UBS suggests sale of Citizens, while Aviva adds 3% on bid talk

Bank’s house broker says selling US business could add up to 12p a share to RBS, or £13bn

Royal Bank of Scotland is widely expected to announce an overhaul of its investment banking business this week, putting parts of the division up for sale and possibly cutting thousands of jobs.

But analysts at its broker UBS believe it could make further bold moves which would benefit both the bank and its shareholders, including of course the UK taxpayer. In particular UBS analyst John-Paul Crutchley pointed to a possible sale of its US regional bank Citizens, which he estimates could be worth between £9.5bn and £13bn or 8.5p to 12p a share. He said:

While there are good reasons (funding, credit rating) why RBS should retain its US regional business for now, the divergence in regional bank M&A exit multiples in the US and RBS’s own stock rating mean that the value of Citizens could represent up to 60% of the current share price, with the business contributing less than 15% of normalised earnings. If RBS’s rating persists, the logic behind disposal and capital return must become increasingly hard to resist. Although cash buyers of Citizens are unlikely in the near term, it does highlight a potential source of substantial value within the group.

He added that increased government involvement in a restructuring could help reduce the taxpayers’ losses on their investment, although he believed the political will for this was probably not there. In the meantime, UBS reduced its earnings forecasts for 2011 to 2013 to reflected weaker investment banking revenues, and cut its price target from 27.6p to 25p but kept its buy recommendation. It also reduced its target price for Barclays from 215p to 199p for similar reasons.

In the market RBS rose 1.06p to 21.13p, while Barclays added 10.2p to 188.3p and Lloyds Banking Group ended 1.12p higher at 27.31p.

The comments follow a note last week from analysts at BarCap, which warned that Britain’s two taxpayer owned banks were likely to have to make another £33bn of provisions on top of the £100bn impairment charges taken over the past four years.

The recovery in banking shares and a rise in the mining sector helped lift the FTSE 100 84.44 points to 5696.70. As various EU officials continued to meet and discuss the financial crisis, sentiment was helped by suggestions from Fitch it would not immediately downgrade France’s credit rating, as well as signs Hungary might be prepared to compromise in its dispute with the International Monetary Fund and the rest of the European Union.

With better than expected results from US aluminium producer Alcoa and strong Chinese imports of commodities, mining shares regained some ground. Kazakhmys closed 58p higher at £10.37 and Antofagasta added 62p to £12.96.

Cairn Energy climbed 8.6p to 270.4p after confirming plans for a .5bn cash return to shareholders following the sale of a majority stake in its Indian business to Vedanta. The company said investors would receive 160p for each share they currently own. Following the news, Oriel Securities raised Cairn from hold to add.

Elsewhere Aviva added 8p to 307p on talk of possible bid interest from Chinese insurer Ping An. A price of around 500p a share was mentioned by traders.

But recruitment group Hays fell 2.65p to 62.7p after it reported 8% growth in fees in the three months to December but warned its clients were becoming increasingly cautious about the economic outlook.

Lower down the market Mears, the social housing specialist which issued a profit warning in November, climbed 7p to 223p after saying current trading was in line with expectations. It said its order book had climbed to £2.8bn, and it was on the lookout for further acquisitions in the domiciliary care market.

Gulf Keystone Petroleum jumped 45.75p to 266.75p after it said a third company could be brought in as a partner for two production blocks in Kurdistan. There was also a revival of takeover speculation, with an oil major such as Exxon previously suggested as a possible predator.

Finally Ilika, which develops advanced materials, added 1.5p to 49.5p after reporting a 17% fall in half year losses to £1.56m. One of its clients is Toyota and some of its products will be used in the batteries for the next generation Prius. Analysts at Nomura Code have raised their price target from 79p to 87p. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds