Will we ever get our money back on RBS? George Osborne wants to start selling off the bank in the next year, but can it be done at a profit?

The Telegraph

2:00PM BST 16 May 2015

Six and a half years ago, the Chancellor of the Exchequer, a clutch of ministers and civil servants, and the bosses of Britain’s banks huddled around a table at the Treasury to thrash out an unprecedented programme to rescue the lenders from oblivion.

While Treasury officials wolfed down tandoori chicken from a nearby curry house, the bankers bristled at the rescue packages being proposed. They insisted that, no matter how much trouble RBS, Lloyds and HBOS were in, the bail-out being proposed would cause widespread panic, worsening the precarious situation.

Ultimately, however, the early-hours rescue package agreed at the office of Paul Myners, then City Minister, proved to be insufficient. The £37bn the Treasury put into RBS and Lloyds in October 2008 had to be followed by another £29bn of taxpayers’ money the following year.

Added this to the billions ploughed into Northern Rock, Bradford and Bingley, and other loan guarantees made to the banking sector, and the level of state backing the banks received during the crisis was almost unfathomable. The National Audit Office says the taxpayer’s total cash outlay peaked at £133bn, and that is before one gets to the many hundreds of billions more in guarantees that were used to support the industry.

Now, almost seven years later, we are starting to recover some of the cash.

Last week the Government’s stake in Lloyds fell below 20pc, down from a peak of 43pc in 2009. The Treasury has now recouped more than £10bn from selling its shares, half what was paid to rescue the bank, and plans to sell £9bn this financial year.

Parts of Northern Rock and Bradford and Bingley, meanwhile, have been sold to Virgin Money and Santander respectively. Those parts that were not sold off have been combined into a new entity, UK Asset Resolution, which is successfully paying down the £48bn paid to rescue the lenders.

In short, the public is finally getting its money back. From its £133bn peak, the taxpayer’s ownership of the banks fell below £100bn last year. The Treasury is planning to get back a further £22bn from Lloyds and UKAR in the coming fiscal year. Things are looking up.

Support for banks (National Audit Office)

That is, except for the Treasury’s biggest remaining investment. In 2008 and 2009, the Government had to pay far more to rescue RBS than Lloyds – £45.5bn compared to £20.5bn – and it took a much bigger stake. It has not sold a penny of its holding in the former, and if it did so today, would do so at a loss.

RBS has been run through the wringer spectacularly in the last few years – billions in fines and mis-selling costs, pay rows, and accusations of destroying businesses are just a flavour of its problems. The bank is yet to make an annual profit since its bail-out, with cumulative losses now at £50bn, and its shares still languish well below RBS’s bail-out price.

However, talk of a government sell-off is now, finally, heating up. For the first time in the almost seven years since its taxpayer rescue, people are asking if RBS is finally ready to be returned to the public.

“It’s certainly something I would want to get moving on in the summer after the election,” the Chancellor, George Osborne, said in a newspaper interview in March. “I would want to see a review on a plan for a disposal.”

UK Financial Investments, the government body that manages the UK’s publicly-owned bank stakes, is inviting applications for new financial advisers, which could include a plan for selling off RBS. UKFI, which would get the ball rolling on any sale, appears to believe it is closer than ever to firing the starting gun.

“Everyone thinks there’s more of a case [for selling RBS] than there was a few months ago,” says one person close to the situation. “Clearly the focus at the moment is Lloyds, but it’s getting nearer.”

Both the Treasury, and RBS executives, would dearly love to start putting the bank back into public arms, but doing so at a profit seems so way off.

At today’s prices of roughly 355p, RBS is almost a third off 502p – the share price that represents how much the Government paid to bail it out.

Even at 404p, which is the bank’s highest share price over the last three years, the Government’s stake is still worth billions less than what was paid for it. Lloyds, in comparison, is trading 20pc above the bail-out price.

UKFI has different figures for what constitutes a break-even for RBS, but the lowest – which takes into account fees and certain dividend payments – is 455p, still far above what the market thinks the bank is worth.

Treasury officials, however, use a different number. RBS is booked differently in the public accounts, making the magic break-even number 407p a share. The difference between UKFI and the Treasury’s number represents the difference between what the Labour government agreed to buy the shares for, and how much they were trading at on the stock market when they were bought.

So on the Treasury’s accounting, RBS is just 13pc off its break-even price, not an unassailable gap. While selling it now would still entail a loss, it would be a less politically-painful one than at 505p. Privately, there are suggestions that the bank is likely to be sold off at a lower price than what was paid, at least at first, followed by potential sales further down the line that raise more money.

Officials point to the effect created by the first sale of the Treasury’s Lloyds shares, to institutional investors, in September 2013. Shares rose significantly after the event, since more of the bank’s shares were being publicly traded. RBS, where the free float is only 20pc, should be an even bigger beneficiary of the liquidity boost provided by its biggest investor selling shares.

An indication of waning government influence at a bank that has, for too long, had the hand of the Chancellor hovering over it should also help. Political, rather than commercial, decisions have often been made at RBS, particularly on pay.

It is widely accepted that selling the bank will be a slow, multi-year operation. It has taken more than 18 months to sell half of the taxpayer’s Lloyds stake, which itself is less than 50pc the size of that in RBS.

The Treasury’s current stake in the bank is worth £33bn, as big as Tesco, Sainsbury’s and Marks & Spencer put together, so a sale is likely to come in several instalments over many years. Better to begin now, accept an initial loss, and go from there, some believe.

Even if RBS is ultimately sold at a loss, officials may be satisfied if this is outweighed by profits from Lloyds and UKAR, according to one source. This would allow the Treasury to argue it has made all the bail-out money back, despite taking a hit on RBS.

“I think people want to see they get their money back. The British taxpayer wants to feel they haven’t suffered some enormous loss,” Osborne has said. The Chancellor could well claim to have done this, even if RBS itself is sold at a loss.

So, what happens next? The Chancellor has promised a review, “in the summer after the election”, into how the bank could be sold. This may not immediately lead to a disposal – Lloyds could be in the middle of a complicated sale to public investors, promised by Osborne, at the same time – and unlike Lloyds, the Chancellor has not made a Budget commitment to sell any shares.

Osborne wants to sell shares sooner rather than later

However, most signs suggest that by this time next year, the ball will be rolling. One source points to the final quarter of this year, by which time the bank will have cleared many of the hurdles that are currently holding back any sale.

The first of these will come quickly. This week, the bank is expected to pay up to $1bn (£635m) to US authorities to settle allegations that its traders, along with those at several other institutions, colluded to manipulate foreign exchange benchmarks.

Later this summer, it will settle a much bigger score, becoming one of the last major banks to pay a major fine to America’s Federal Housing Finance Agency and Department of Justice over allegations it mis-sold mortgage-backed debt, despite the loans being toxic.

Estimates of the size of this penalty vary – other banks have paid as much as $17bn, and analysts believe RBS could be charged as much as $10bn – but will undoubtedly be many times bigger than penalties for manipulating either Libor or currency benchmarks.

While nobody at the bank is in any doubt that it is the biggest single cloud hanging over it, UKFI officials believe that getting it out of the way will be a major advantage, removing the uncertainty that hangs over the shares.

Osborne’s desire to sell off RBS has even led to suggestions that the bank could be pressured into an early settlement with the US authorities. “A corollary of [any sale] would mean the UKFI giving a push to RBS management to settle on their US mortgage legacy issues,” said Chirantan Barua, an analyst at Bernstein, in research this month.

“An end to that would take out the single biggest tail risk to the stock, but could also mean that the bank ends up coughing a higher amount.”

The bank is expected to settle this matter in the third quarter of this year, which will remove much of the uncertainty around investing in RBS. A smaller-than-expected fine could send shares upward, leading the bank closer to the Treasury’s 407p break-even.

When this is over, the bank’s turnaround will not be over by any means. It still has to complete an expensive de-merger with Williams & Glyn, the challenger bank it is being forced to set up. It is spending billions on shrinking its oversized investment bank, also a costly exercise.

The bank is also not expected to pay a dividend for at least another two years, which rules much of the UK’s shareholder base out of investing in it.

But in a few months, many of the problems hanging over RBS will have cleared, opening the door to Osborne finally starting to, in his words, “get rid” of the bank. Whether the Chancellor can do so at a profit remains to be seen.

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