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OPINION

Banking on a turnaround

Banking on a turnaround
August 7, 2015
Banking on a turnaround

Our banking correspondent Ian Smith presents a more sanguine view of the transaction on page 9 - which is that as things stand it could be a long time, if ever, before the shares hit the magic break-even level, but the gradual removal of the government-owned stake combined with the slow-but-steady benefits of restructuring could, as its advisers suggests, underpin a medium term recovery.

This sensible theory is that the shares will flounder for as long as the government stake remains a controlling one – would-be investors do not like large stock overhangs that threaten to flood the market with shares in the future, so the first tranche of the sale was never going to come at a knockout price. Looking back further to the privatisation of the Royal Mail, and the same accusation of selling off public assets on the cheap was levelled at the government. That criticism proved wide of the mark, of course - Royal Mail's shares deserved to be cheap simply because of the structural challenges it faced, and because new investors needed to be offered some upside.

Indeed, those who criticise with the benefit of hindsight have no clue what the future has in store. It's easy to say the chancellor could have extracted more value from the first tranche of RBS disposals by selling at 400p a few months back, but should he wait for another bounce market conditions could deteriorate further. And an earlier disposal of RBS could easily have tarnished the orderly Lloyds sell off – which, incidentally, the government has made a tidy profit on.

But I do agree that, having been put on the hook for bailing out the banks the public at large should now have an opportunity to participate in their rebirth as wholly private entities. Lloyds’ sale to institutional investors has gone so well that the government is now said to be considering scrapping plans for a retail offer – given the added complexity and expense of marketing issues to the public it’s easy to understand why, but making good on its promise to do so would put to rest suggestions of cronyism.

Perhaps the most overlooked point of all, though, is that bank bailouts were never intended as a profit-making enterprise, but a means of rescuing the UK from economic Armageddon. That job is now done, and the time for state-ownership is over. A profit would be nice, but a properly functioning market in bank shares would be better.