■ Government to start selling stake
■ Treasury accepts initial loss
■ Current taxpayer stake at 80 per cent
The Royal Bank of Scotland (RBS) has hung like the mariner's bird around the government's neck since the bank bailouts of 2008 - but perhaps not for much longer. As widely trailed, chancellor George Osborne used his Mansion House speech to announce that the government would begin to sell its stake in RBS in the coming months, despite the losses this would crystalise.
RBS's shares, four-fifths of which remain publicly owned, have lagged well below the break-even price of about 455p at which the Treasury amassed the stake. The size of this overhang is viewed by many as one of the obstacles to a share-price recovery. The government’s adviser on the RBS privatisation, Rothschild, has used this exact argument to support its contention that increasing the free float and liquidity of the stock will boost the share price, creating a virtuous cycle for the sell-off.
In defence of its decision, the Treasury provided Rothschild figures showing that the government's total bank bailout programme had delivered a £14.3bn surplus so far. However, this did not include the cost of funding the interventions, namely the interest paid on the associated government debt.
Investec Securities says…
Buy. The timing of the announcement was arguably somewhat premature, dictated more by politics than market timing. That said, we continue to believe 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 by 2016. Although we do forecast moderate share price appreciation, we do not entirely agree with the Rothschild view, and suspect that some investors may see it as encouragement to keep their powder dry ahead of the promised institutional share offering.
Cenkos Securities says…
Buy. In the season for graduation ceremonies, it seems fitting to let RBS move on to a brighter future. As happened with Lloyds, what will matter more is not the weak EPS and return on equity expected in the near term, but rather the very strong capital ratios that should come after the disposals of Citizens and Williams & Glyn, along with the longer-term recovery in profitability made possibly by refocusing on the core domestic retail and commercial banking franchises. We expect RBS's common equity tier one ratio to exceed 15 per cent by end-2016, which should make it easier for the bank to resume regular dividend payments. Trading at a 4 per cent discount to estimated 2016 tangible book value, the shares remain attractive.
