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LONDON (Alliance News) - Chancellor George Osborne is to begin selling the UK's 80% stake in Royal Bank of Scotland Group PLC after both the Bank of England and banking group Rothschild signalled that the time has come to initiate the lender's return to full private ownership.
Delivering his annual speech at Mansion House in London on Wednesday, Osborne said that kicking off the sale of the government's stake six years since completing the injection of GBP45.5 billion into the bank is the "right thing" to do. The Chancellor's speech had been highly anticipated by a wide range of stakeholders, including bankers, investors and taxpayers, who had been waiting to hear about his plans for the RBS stake and the bank levy imposed on banks in 2011.
While Osborne provided details about selling the RBS stake, his speech did not include explicit reference to the levy, which has been seen to have played a part in HSBC Holdings PLC's decision to review whether to relocate its global headquarters from London, although the Chancellor said that making Britain the "best place" for the headquarters of European and global banks is in the national interest. The levy has been seen to disproportionately affect HSBC and fellow Asia-focused lender Standard Chartered PLC as it is imposed on global balance sheets and not just in the UK.
Acknowledging the dilemma presented by having to decide if it is wise to sell the RBS shares at a price below the average paid by the Labour government in the midst of the financial crisis of 2007-09, Osborne said the disposal should be seen in the context of currently being in a position to generate an overall surplus of GBP14.3 billion from the interventions paid for by taxpayers in the banking sector as a whole, citing analysis from Rothschild. However, a footnote in Rothschild's research showed that its GBP14.3 billion surplus estimate is stated "before the cost of funding the interventions".
The government has already begun to return Lloyds Banking Group to the private sector, confirming earlier on Wednesday that it has disposed of a further 1.09% of the bank to leave it with a 17.9% stake, compared with the 43% stake held following a GBP20.5 billion bailout needed during the financial crisis.
Osborne said the government can begin to sell its stake in RBS in the coming months, with the privatisation initially set to target institutional investors ahead of retail investors due to the complexity involved.
"From bailing out the banks to bringing them back from the brink, now is the time for RBS to rebuild itself as a commercial bank no longer reliant on the state, but serving the working people of Britain," Osborne said in his speech.
Crucially, Osborne has secured support from Mark Carney, the governor of the Bank of England, and Nigel Higgins, the chief executive of the Rothschild Group responsible for an independent report on the UK's stake in RBS commissioned by the Chancellor.
Led by Chief Executive Ross McEwan, RBS has continued to turn itself into a UK-focused retail and corporate bank, one that has no need for a standalone investment banking division, a world away from the strategy of global expansion pursued by Fred Goodwin, who led the bank in the years leading up to the crash.
Fines for past misconduct, the bill from bad business decisions exacerbated during the crisis, and the costs of restructuring the group have caused RBS to lose tens of billions of pounds since 2008.
In a letter to Osborne, Carney wrote that public ownership of RBS has served its purpose, preventing the spread of financial chaos at a time when the UK's financial system was "extremely fragile" and the bank was on the verge of collapse.
"Continued public ownership without a foreseeable end point runs risks including limiting RBS' future strategic options, and continuing the perception that taxpayers bear responsibility for RBS losses. In these regards, there could be considerable net costs to taxpayers of further delaying the start of a sale," Carney wrote.
"In contrast, a phased return of RBS to private ownership would promote financial stability, a more competitive banking sector, and the interests of the wider economy. Given the progress RBS has made in recent years, there are considerable potential benefits to commencing this process in the near-term," Carney added.
Rothschild's report concluded that it is in taxpayers' interest for the government to "set in train an initial small disposal" of shares in the bank.
The argument put forward by Rothschild was based on five key points, with the first being that beginning the sale would increase the free float of the bank's shares on the market, thereby helping to market the remaining shares for larger sales on better terms in the future.
Secondly, beginning the process to return RBS to private hands and sending a "strong signal" that it is recovering could bring benefits by removing any impression among investors that the bank may not be run for purely commercial purposes.
The report highlighted that asset yields, which have been driven down by central banks' policies to stimulate economies in the wake of the crash, have helped banks to shed unwanted assets as part of their restructuring efforts and lowered their funding costs, playing a key role in driving market demand for bank shares.
According to Rothschild's report, the market conditions are good for financial assets and bank shares, with the current price of RBS shares "reasonably" representative of its future prospects.
RBS is ready to be sold, according to the report, which cited a reduction in the size of its balance sheet by more than GBP1.1 trillion since the end of 2008 and the strategic plan set in place by Ross McEwan.
With RBS still facing numerous risks, including litigation and fines over historic transgressions, some analysts have raised concerns that there could be major obstacles standing in the way of any plan to begin the privatisation process. Neither Rothschild nor Carney seemed to think those risks presented an overwhelming stumbling block to getting the sale of the government's stake underway.
Carney said it is "widely known" that RBS faces potential troubles from litigation, past misconduct, the implementation of structural reform and work to spin off the Williams & Glyn challenger banking brand.
"But while risks inevitably remain, the threats posed by RBS to the UK financial system are now materially different to those faced in 2008/9. And these headwinds will likely persist regardless of the ownership structure of RBS. The need for public intervention is therefore now much diminished, and indeed may now pose an impediment to the next phase of RBS' recovery," Carney wrote to Osborne.
Rothschild's report said the future financial impact of risks relating to litigation and past misconduct is "inherently uncertain".
"At present, analysts believe that there is significant risk in relation to a lawsuit brought by the FHFA in the United States and associated government investigations. There is an argument that the government should not sell shares until the outcome of this litigation is known," the report said.
"However, there seems little reason to believe that RBS?s current share price does not reflect a reasonable assessment of the likely costs, and, based on our valuation work, there is no clear evidence that RBS?s share price is discounting the possibility of materially higher losses than this," the report said.
"On this basis it is not clear that there is much value to the government in waiting until the outcome of the case is known: the outcome may be better, worse or in-line with market expectations and there is no reason to think that the government is better able to assess or manage this risk than potential purchasers of its RBS shares."
"Nevertheless, it may be that only smaller placements of RBS shares would be possible before this issue is resolved as some investors may be deterred from buying while this uncertainty remains," the report added.
Rothschild concluded that litigation risk is no reason for the government to put its plans to sell its RBS shares on hold.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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