■ Chief executive steps down
■ Privatisation pressure building
■ Lacklustre trading
News last week that RBS's (RBS) chief executive Stephen Hester is to step down by the year-end was certainly unexpected. When added to the expectation that the government will soon begin setting out its thinking for selling the government's bank shares (possibly just after Investors Chronicle goes to press - at the chancellor's Mansion House speech on 19 June), it's unsurprising that RBS has been dominating the headlines.
Mr Hester's departure looks suspiciously like the result of a difference of opinion between his view and that of the government regarding the privatisation strategy. Some analysts, for instance, think George Osborne may be seriously considering splitting RBS into a 'good bank', containing the best assets and which can be privatised, while the dross is hived-off into a 'bad bank'. Such a proposal is expected imminently from the Parliamentary Commission on Banking Standards. But it's hard to see that being taken seriously given that the scheme would, presumably, first require the use of scarce taxpayers' money to fully nationalise RBS.
Unfortunately, RBS's trading performance also remains lacklustre. A weak UK economic backdrop has done the bank's recovery no favours and government efforts to boost SME lending and banking sector competition are bad news for return on equity prospects. As for finding a new boss, few will relish the political meddling that accompanies the job. But names in the frame at present include Standard Chartered's (STAN) Richard Meddings and RBS' own finance director, Nathan Bostock.
Investec Securities says...
Sell. The manner of Mr Hester's departure is deeply unsatisfactory. Despite persistent speculation, it wasn't his decision to leave and chairman Sir Philip Hampton has confirmed "Treasury involvement". With the Parliamentary Commission on Banking Standards due to report imminently, and with the chancellor expected to comment on the privatisation process, the timing is curious, indeed. Since RBS failed in 2008, the UK government has repeatedly made a bad situation worse. Inconsistency and mismanagement have hurt shareholder value and, as the 81 per cent shareholder, it reaps what it sows. We retain our sell recommendation and a 300p share price target. Expect pre-tax profit of £1.29bn for 2013, giving EPS of 2.5p.
Espirito Santo Investment Bank says...
Sell. Mr Hester's departure was clearly against his wishes and it appears that Mr Osborne had different ideas as to how the bank should be run. Indeed, it seems that the chancellor is still considering the possibility of splitting RBS into a good bank/bad bank. The political wrangling has significantly impacted the franchise, especially the markets business, and it's unclear whether the business can generate a decent return in excess of its cost of equity - we think the core business will struggle to generate a return on equity higher than 8 per cent over the next three years. Mr Hester's exit only creates more uncertainty.
