RBS tightens hold on Citizens; big U.S. banks spurn acquisitions

A flag flies over the former headquarters and registered office of the Royal Bank of Scotland (RBS) in Edinburgh, Scotland March 29, 2012.

NEW YORK (Reuters) - Royal Bank of Scotland Group (RBS.L) has no plans to sell Citizens Financial Group, its retail bank in the United States, contrary to reports in the media and chatter among some investment bankers, an RBS executive said Monday.

"Citizens is a core franchise in a very attractive geography," Bruce Van Saun, group finance director of the Scottish bank, told investors at a Barclays financial services conference on Monday. "We have nothing big left to sell."

RBS, which is majority owned by the British government as a result of a bailout during the financial crisis, bought Rhode Island-based Citizens in 1988. Along with other European banks struggling to raise their capital ratios and reduce their high-risk loans, it has been slow to participate in an anticipated fire sale of assets in the United States.

RBS is disappointed in Citizens' relatively weak 8 percent return on equity this year, but has confidence in the U.S. operation because it provides strong geographical diversification and is well regarded among its business and retail customers in more than 30 states, Van Saun said. Return on equity, a key measure of shareholder profitability, almost doubled to 6.3 percent in 2011 from 2010 and should reach 12 to 14 percent within a few years, Van Saun said.

"We're patient," he told investors at the Barclays conference. "I think we are doing our shareholders a good turn to keep Citizens in the portfolio."

BANK M&A IN DOLDRUMS

His remarks and those of other bankers at the conference combined to pour cold water on investors' hope for a pickup in merger activity among U.S. banks. Two other bank executives at the Barclays conference who are active acquirers said bank lending remains weak, leading them to focus on expanding product use among existing customers.

"We have little or no interest in using our capital for M&A at this time," PNC Financial Services Group (PNC.N) Chairman and Chief Executive James Rohr said.

The Pittsburgh-based bank, the eighth largest commercial bank in the U.S., is busy integrating almost 400 southeastern U.S. branches it bought last year from Royal Bank of Canada (RY.TO), Rohr said.

Until loan demand and interest rates pick up, PNC has little need to grow by acquisition at a time when it is flush with unused customer deposits, he said, adding that demand is unlikely to occur anytime soon.

A slight rise in commercial loan demand in the first half of the year is now slowing because of renewed uncertainty about the U.S. and global economies, bankers said.

PNC will not make the mistake of locking itself into long-term, low-rate loans despite weak demand, Rohr said. "We're not going to chase" loans, he said, noting that some competitors in Ohio and the U.S. Southeast are being very aggressive in underpricing consumer and commercial loans.

KeyCorp (KEY.N), another regional bank that has historically been an active acquirer, also said its acquisition appetite has been curbed.

"I don't see any meaningful catalyst industry-wide" to spur mergers and acquisitions, KeyCorp Chief Executive Beth Mooney told the Barclays conference.

LOAN DEMAND STILL WEAK

Commercial loans and home equity loans that had shown signs of a rebound in the first half of the year are again moderating, she said. She characterized bank customers' attitudes toward the economy as migrating from "cautiously optimistic" in the first half of the year to "more cautious" today.

Both Rohr and Mooney said that the strains of oppressive regulations, demands to build capital and persistent low interest rates will eventually pressure small banks to put themselves up for sale at attractive prices.

The value of worldwide mergers and acquisitions among financial institutions this year has plummeted 36.4 percent from the comparable period in 2011, according to Thomson Reuters data. Financial institution deals in 2011 totalled $256.7 billion (£160.53 billion), less than half the $550 billion of transactions consummated in 2007 before the financial crisis.

Even large U.S. banks that were furiously cutting assets to meet new capital regulations and cut their credit exposures said they expect divestitures to slow down.

Bank of America B.ACN will continue to cut $4 billion to $5 billion of assets a quarter over the next two years, Chief Financial Officer Bruce Thompson said at the Barclays conference, but it will be achieved primarily by a "runoff" of unprofitable loans rather than through sales of major portfolios or businesses. BofA sold more than $50 billion of assets in the last 2-1/2 years, but is now beginning to focus on aggregate loan growth.

Bank of America will explore acquisitions of portfolios of European banks in the United States if such "pockets of opportunity" include loans of existing BofA clients or clients it would like to know. Such deals, he said, would not be major in size.

Separately, RBS's Van Saun said the bank expects to price an initial public offering of its Direct Line UK insurance subsidiary in October, with a secondary offering planned for next. The deal had been expected, since UK government officials had directed the bank to sell 50 percent of the operation this year and the rest by the end of 2014.

Van Saun said the bank had entertained bids from other insurance companies and private equity firms but did not get attractive offers.

(Reporting By Jed Horowitz; Editing by Tim Dobbyn)