7 September 2015

This week saw Chancellor Osborne surprise markets by starting to sell down the UK taxpayer’s 78% stake in Royal Bank of Scotland (RBS). This stake was inherited from the previous Labour government’s 2008 bailout of the systemically important institution at the height the financial crisis. UKFI offloaded a 5.4% stake on Monday night to institutional investors at a 2.5% discount of 330p/share raising £2bn against the 2008 £45bn rescue package, however this meant crystallising a £1bn loss as the share price is well below the 502p price paid and the 407p breakeven after various adjustments. While bailout peer Lloyds Banking Group (LLOY) has been a real success story in terms turnaround, return to profitability, share price recovery to near 100p, resumption of dividends and government stake-sales, the beginning of the process for reprivatizing RBS is attracting attention for many more reasons. Many of them wrong in our view.

While the start of the sale is ahead of schedule, it is generating taxpayer discontent at having begun at a loss. A few points to discuss though. Firstly, this is only the beginning of the end of the process, with a 72.9% stake remaining to be disposed of and thus potential for breakeven to be achieved for certain sales should the shares recover to 2015 highs, although profits might be a tall order needing recovery to levels last seen in 2010. Secondly, if investors are so sure that profits can be made, surely they’d like to get their hands on extra shares in the market to be able to invest and book any profits themselves rather than letting Chancellor Osborne do it for them. Thirdly, the RBS stake is only being sold at a loss thanks to profits from the successful stake reduction in LLOY allowing for it to be offset.

Lastly, if the bank is on a more stable footing (like LLOY), should the government not release RBS (as it is with LLOY, now owning <14% vs 43% bailout) from state ownership back to the market wilds ASAP? At the end of the day, with the worst of the crisis now behind us, it’s not the government’s job to hold onto key stakes in privately-run companies. The bank may not be in as strong a position as LLOY but it is certainly moving in the right direction. While more stake sales are likely (although not for 90 days at least) what will be interesting is if and when George decides to offload a big chunk via a discounted placement to retail investors. He didn’t have to with LLOY, but it might be in his interest to let smaller investors in on some of the action with RBS. Keep in contact with Accendo for any updates on this.

Mike van Dulken, Head of Research