February 23, 2012 / 5:11 PM / 8 years ago

Dealtalk - Could government start selling RBS shares at a loss?

LONDON (Reuters) - The government should consider kick-starting the sale of its 45 billion pound stake in Royal Bank of Scotland at a loss to cut growing political interference and boost the appeal of the bank for private investors.

A pedestrian walks past an RBS branch in the City of London January 27, 2012. REUTERS/Suzanne Plunkett

That, at least, is the view of some analysts, bankers and investors who say bold action is needed to start the process.

RBS on Thursday reported a 2 billion-pound loss for last year, its fourth straight annual loss.

Taxpayers are sitting on a 20 billion-pound paper loss on their 45.5 billion pound rescue of RBS, after bailing it out in 2008 to save it from collapse. It left Britain with an 82 percent stake.

Hester was brought in to oversee what he dubbed the biggest ever bank restructuring, and he is three years into a five-year plan to turn the bank around.

Britain paid an average of 50 pence for each of the 90 billion shares it bought. When the shares rallied to over 58p two years ago it sparked optimism that UK Financial Investments, the body that holds the shares, would soon start the sale process and make a tidy profit in the process.

But Britain then unveiled plans to shake up banks to make them safer but less profitable. Unlike the United States, it did so before it had recovered its cash from the banks. Alongside other grim regulatory and economic news, bank shares slumped.

RBS shares have risen by more than a third this year, but even after a 3 percent rise on the day on Thursday they lag at 28p, some 44 percent below the taxpayer purchase price.

“The government must recognise that it is better to sell RBS for less than its ‘in price’ of 50p because the political cost of carrying it is now too high,” said Manus Costello, analyst at Autonomous Research in London.

But the process is complex and potentially arduous, and is likely to take at least 18 months, Costello said in a note for clients this month entitled “Something must be done.”

He sets a five-part plan, involving a major restructuring of RBS’s complex capital structure and a need to get approval from European competition regulators to change the share structure. Then RBS should sell its U.S. business Citizens to deliver almost 9 billion pounds of extra capital and use it to buy back the government’s shares.

Helping the process, Costello said, is that while the taxpayer shares were bought at an average of 50p, the investment sits on the government’s books at 41p a share due to complex national accounting rules.

A fund manager who holds RBS shares said any sign the government was considering an exit route would be good news.

“They always said they would start the process early, and it would be a good idea if they got out there and started to test potential market demand,” he said, advocating a measured, incremental sales process rather than a substantial offload.


Most analysts and investors see the sale of Britain’s stake in RBS as years away, however.

The bank is not alone in facing that prospect. Britain also holds a 40 percent stake in Lloyds after a 20 billion pound rescue, while Commerzbank’s hopes of getting rid of the German state as a part-owner have been delayed, and the state may even have to pump in more cash. No fast exit is expected there, government sources have said.

But several of RBS’s top investors have said they are increasingly concerned about the government’s interference.

Some reckon the government should scrap UKFI and put its RBS and Lloyds shares under the Treasury’s direct control.

A recent row over pay for executives and banks has sharpened that view, increasing the politicisation of the bank.

Getting value out of RBS has prompted other proposals, including one that the shares should be given away to taxpayers to maximise future returns and reward the public for the bailout. But most have quickly been dismissed.

The bank’s bosses say the share sale is out of their hands.

Their task was to make the bank “safe, sound and commercially attractive” so investors would want to buy them, RBS Chairman Philip Hampton said after Thursday’s results. UKFI had not given any indication that it planned to start selling, he said.

Bankers said other reasons to consider selling shares at a loss would be to improve liquidity in the shares, increase its shareholder register to demonstrate to private investors it is a viable, standalone investment, and to test the water for what will be a multi-year process.

The average daily value of trading in HSBC shares was more than five times the RBS average last year, and trading in Barclays shares was almost four times and even for Lloyds it was 2.5 times as high, according to Reuters calculations. Investors prefer the most liquid stocks.

Although RBS remains loss-making, the bank has taken 42 billion pounds of “clean-up costs” in the past three years as it has shed more than 700 billion pounds of more risky assets.

“We had to defuse the biggest timebomb in banking balance sheet ever assembled. And the irony is the faster we reduce risk, the greater the losses we produce,” Hester said.

Additional reporting by Sinead Cruise; Editing by Greg Mahlich

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