12 June 2015

This week the UK Government made big announcements in terms of UK Index stocks it is involved with.Firstly,it surprised us by selling half its remaining 30% stake in Royal Mail (RMG) in a single £750m transaction, and within only a week of announcing its intention to move towards full privatisation less than two years after the hugely successful Oct 2013 IPO. We had hoped the process would be slower with some drip-feeding of shares into the market as has been the case with its exit of bailout holdings in Lloyds Banking Group  (LLOY). While drivers may exist for upside potential (business, sector), including increased share liquidity, we wonder whether the 15% stake sale at 500p (3% discount) may limit near-term interest, with traders expecting subsequent stake sales to require similarly attractive pricing.

UK Chancellor George Osborne also used his annual Mansion House address to confirm the government would seek to exit its holdings in Royal Bank of Scotland (RBS) within months. Criticism was clear, however, regarding him being prepared to wear a £7bn loss on the bailout (79% stake; rescued at adjusted average 455p; shares trading 356p) in stark contrast to the £3.5bn profit already booked on Lloyds Banking Group  (LLOY) (41% stake, rescued at adjusted average 73.6p; shares trading 87p). While giant RBS still has much restructuring to do compared to smaller LLOY, the argument is that the government need no longer hold these big bank stakes and should release them back to the market. LLOY has done well by slimming down, returning to profit and most importantly being in a position to resume dividends after their financial crisis cancellation. Can much bigger RBS keep improving, similarly seeing interest return as shares return to the market. Some investors are bank-ing on it.

Mike van Dulken, Head of Research