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RBS in the bargain bucket

Heads are being scratched about the government's timing of its RBS sale, but shareholders could start to feel the benefit
August 4, 2015

Last year, shares in Royal Bank of Scotland (RBS) rose by 13 per cent. They have fallen by about the same proportion this year. The government may appear to have missed the boat on a decent sale price, but chancellor George Osborne has decided to jump into the water anyway.

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The government raised £2bn from its placing of 630m shares with institutional investors at 330p, representing about 5 per cent of the bank. Opposition politicians are focused on the theoretical £1bn in lost value for the taxpayer, in a game of ‘Look at what you could have won’ worthy of Jim Bowen’s TV classic Bullseye. There is of course no guarantee that the shares will ever recover the average ‘in’ price of 502p.

But for shareholders, it is a major first step to reducing the government’s overhang that has cast its long shadow over the banking group’s shares. That is good news both in the sense of a big seller leaving the scene, as well as reducing the government’s control of the bank’s governance.

The Treasury has been convinced by investment bank Rothschild that kicking off the sale will improve the “marketability” of the shares, raising the free float and luring in value investors, thereby improving the value of the deal for taxpayer as it goes along. This an important test for the state finances: the Treasury is looking to raise £5.8bn in each year from 2016/17 to 2019/20.

It can reference the progress of Lloyds Banking Group (LLOY), where it has now managed to reduce the taxpayer stake to below 14 per cent. Lloyds’ shares are up 8 per cent so far this year, even as the government has drip-fed its shares onto the market – indeed, such has been the success of the institutional sale that questions have been raised over whether a retail share offer, which the government has promised, is worth the time and cost.