Royal Bank of Scotland (RBS) has taken another step towards reinstating capital returns to shareholders. The government has undertaken its second share sale, placing 925m shares at 271p apiece via an accelerated book-building process to institutional investors. That was equivalent to a 7.7 per cent holding, reducing the Treasury’s stake to 62.4 per cent.
The placing price represented a 3.5 per cent discount to the shares’ closing price the day prior to the disposal, but it's also 46 per cent below the average price the government paid per share when it bailed out the distressed group in 2008. That means, after raising £2.5bn in proceeds, the state has booked a £2.1bn loss on the sale.
And yet, when the government offloaded its initial tranche in August 2015, the placing price of 330p represented a much narrower discount of 2.3 per cent to the then market price. This belies the notion that the bank is arguably in the best shape it has been since the bailout. Indeed, RBS reported its first attributable profit (£752m) in a decade in 2017, following a substantial reduction in litigation and conduct costs, although reported profits in the current year will be constricted once £2.5bn in restructuring costs are absorbed, together with £2bn in pension contributions and $1.4bn (£1.04bn) to cover the balance of the settlement with the US Department of Justice (DoJ).
The DoJ dispute – relating to alleged mis-selling of mortgage-backed securities immediately prior to the financial crisis – was the last major obstacle to management reinstating dividend payments. The resolution of the issue paved the way for the banking group’s gradual return to private ownership. Since that settlement was announced, consensus forecasts for this year's dividend pay rate have increased by 42 per cent to 7.1p, according to Bloomberg.
But despite the long-term gains from a return to normality, the privatisation process is likely to limit the growth potential of the banking group’s shares in the short term. The shares fell almost 5 per cent on the day the placing price was announced. Chancellor Philip Hammond budgeted for an annual £3bn in share sales for the five years to 2023 in his Autumn Statement. Investec’s Ian Gordon reckons RBS could carry out directed buybacks from 2019 – after gaining shareholder approval – which would reduce the “overhang to be sold into the market”. He assumes that £1.8bn in annual buybacks, coupled with the government’s share placings, would result in a complete state exit by 2023.
