With chancellor George Osborne's Mansion House speech due on 19 June, the rumour mill has been working overtime to second guess what he'll say about selling off the government's 39 per cent take in Lloyds (LLOY) and its 81 per cent slice of the Royal Bank of Scotland (RBS). That has been spurred by a radical proposal this week from the pro-Tory Policy Exchange think tank, which envisages a mass share distribution to the public. But, while Mr Osborne will surely say something on re-privatisation, don't expect the Policy Exchange's ideas to lead that agenda.
Let's look at the proposal - the think tank wants to hand out, free, some 70 per cent of the government's Lloyds stake to UK taxpayers, with the remainder sold to institutions and retail investors. Should taxpayers sell their shares, the government would keep the proceeds up to some floor price - with proceeds beyond that level accruing to individuals. Similar medicine, on a less ambitious scale, is envisaged for RBS. But 'gifting' the shares like this won't generate the huge slug of upfront funds to help tackle the budget deficit - there will be some cash from the placing element, but the rest will likely trickle in as UK taxpayers sell their shares. Moreover, individuals will only sell and therefore receive any kind of windfall if the shares trade above a floor price - hardly the stuff to inspire voters in the run up to the 2015 general election.
Apparently, Treasury insiders have already branded the suggestion as "interesting" but "premature". It's also an idea that won't do existing Lloyds shareholders any favours. "We would expect issuance on this scale to weigh on the shares, pulling the share price back towards fair value," said analyst Ian Gordon of broker Investec Securities. According to analyst Shailesh Raikundlia of Espirito Santo, it's also "fraught with complications and might lead to adverse publicity".
So Mr Raikundlia believes that "some form of orderly institutional sale process would seem more likely". If combined with a decent retail element, this more straight-forward approach makes sense. What's more, for Lloyds, action sooner rather than later looks wise - Lloyds' shares, at 61.2p, now trade just above the government's 61p buy-in level. And, while Lloyds has its share of problems - bad debts in its Irish book, for instance - the bank is an altogether healthier investment proposition than its more troubled peer, RBS. Mr Osborne should therefore waste no time.
Selling RBS shares is far more complicated, though. To begin with, a hefty bad debt legacy problem means RBS' return to health is taking time - the Parliamentary Commission on Banking Standards is even considering a proposal to split RBS into a 'good' bank, containing the best quality assets, and a 'bad' bank, where the bad debts would be dumped. It's unlikely to be adopted as it would first involve fully nationalising RBS - but it does demonstrate the scale of the rehabilitation still required. Reflecting such woes, RBS' shares - at 330p - haven't traded above the government's 502p buy-in price since August 2010. And selling at a big loss is, politically, a non-starter. But that doesn't mean a conventional institutional and retail sale process isn't the best solution - just don't expect it before the general election.
