NEW YORK (The Deal) --Shares in Royal Bank of Scotland (RBS) rose Thursday after Chancellor of the Exchequer George Osborne, as expected, used a closely watched annual speech Wednesday night to announce the start of the long-awaited selloff of the government's near-80% stake.
The Edinburgh lender was trading up 7.2 pence, or 2%, at 362 pence by mid-afternoon, giving it a market value of close to £42 billion ($65 billion) after Osborne, in his Mansion House speech to City grandees, said the state would begin extricating itself "in the coming months" from a holding it accrued through a £45 billion credit-crisis bailout. The selloff will start with a sale to institutional investors.
In the U.S., RBS was up 1.5% to $11.19, down 7.6% for the year to date.
Osborne has been slowly changing his position from wanting to wait until the state can recoup its investment before selling the shares. In deciding it's time to get out now, he took advice from bankers at Rothschild, who said the market currently looked kindly on bank shares and that starting the state selloff will improve liquidity in the stock, and make the government's remaining shares more marketable.
It may also "bring further benefits to the bank and therefore to the taxpayer as shareholder by beginning the privatization and sending a strong signal that RBS is on the road to recovery," the Treasury said, citing the Rothschild report.
The holding has been a politically uncomfortable one for the government amid rows over executive pay and "conduct" issues at the bank, including transatlantic fines for the rigging of foreign exchange and Libor rates --Royal Bank of Scotland agreed to pay $395 million for forex misdemeanors just last month -- and a U.S. settlement related to subprime mortgages.
But the bank remains loss-making and an additional cloud hangs over because of the Competition and Markets Authority's review of the markets for personal current accounts and banking services for small and medium-sized enterprises. That review won't be complete until next May and some lawmakers have urged antitrust regulators to revisit the notion of breaking up Britain's largest banks.
Besides Royal Bank, these include Lloyds Banking Group (LYG), the current account market leader, which is now less than 18%-owned by the government after it began selling off its shares in September 2013; HSBC Holdings (HSBC) and Barclays (BCS).
The U.K. bought its shares in Royal Bank of Scotland at a price of 502 pence. The decline since then is in part a consequence of six years of asset run-downs and divestments to shrink the bank and comply with European Commission edicts as the bank abandoned a one-time aspiration to be a leading global "universal" bank.
Among these are its divestment of its Providence, R.I.-based Citizens Financial Group (CFG). The U.K. lender, whose former CEO, Stephen Hester, had fought to retain the U.S. business, sold more than a quarter of the bank in a March IPO worth $3.7 billion and will sell the rest of its remaining 40.8% stake by the end of next year.
Rothschild estimates that the U.K. government would have lost £7.2 billion on its Royal Bank investment if it had sold its stake in one piece based on the price as of on June 5. But the bank insisted that would be more than offset by profits the government made from other state selloffs, which include the Lloyds' share offerings and the sale ofNorthern Rock plctoVirgin Money HoldingsUK plc.
Rothschild said including fees as well as the sale proceeds, the state would have made a gain of £14 billion on its credit crisis banking-sector intervention, assuming all state assets were sold as of June 5.
"As of today, in the absence of unforeseen circumstances, taxpayers can comfortably expect to secure proceeds from their interventions in the banks that exceed the money put in," Rothschild CEO Nigel Higgins wrote in a letter to Osborne.
Investec Bank analyst Ian Gordon maintained his buy recommendation on the stock after Osborne's announcement.
"We think that the timing of last night's announcement was arguably somewhat premature, dictated more by politics rather than, necessarily, an exercise in optimizing market timing. That said, we continue to believe that the RBS share price will see support on a 12 month view from the emergence of a material capital surplus and a return to (reported) profit in 2016," he noted.