Earlier this week, reports suggested that Canadian banking giant Toronto-Dominion (TD) Bank is preparing a £8 billion ($12.8 billion) bid to acquire Citizens Bank – the American retail banking subsidiary of The Royal Bank of Scotland Group (NYSE:RBS).  The development is a piece of good news for the British banking group, which announced plans to exit the business in phases by going the IPO route this February, as it is likely to bring more potential suitors for the business unit to the front – allowing RBS to make more money in the process of disposing of the unit. ((RBS to unveil £8bn US bank float, The Telegraph, Feb 24 2013))
The U.K. government has put considerable pressure on RBS for nearly two years now to focus on its retail business in the U.K. and to scale down its international presence, and the 81% stake the government has in the group makes it difficult for RBS to ignore the pressure. As its presence in the U.S. is by far the largest compared to its retail banking operations in countries outside the U.K., these operations have remained in focus since then. RBS gave in to the pressure earlier this year by agreeing to sell a 20-25% stake in Citizens Bank through an IPO slated for late 2014 or early 2015. But a bid that values the entire business in line with RBS’s estimates looks like a good deal for the bank at a time when it is struggling to shore up its capital structure to meet stringent regulatory requirements.
We maintain a $11 price estimate for RBS’s stock, which is about 10% below current market prices.
TD Bid In Line With RBS Estimates
The importance of RBS’s operations in the U.S. under the Citizens Bank and Charter One Bank brands to its overall business model becomes clear from the chart above, which shows that the unit contributes to almost 11% of its total value – much more than the contribution from all its other international retail banking operations put together (6.6%).
We detailed the possibility of RBS exiting its Citizens & Charter One businesses in the U.S. as a part of our article ICB Directives to Stunt RBS’s Growth, Could Lead to Citizens Sale back in December 2011. Facing pressure to clean up its balance sheet and to concentrate on operations in the U.K., this was always a logical next step for RBS with the only deterrent being the need to find someone willing to pay something around the fair price of the business. But the group’s management (especially outgoing CEO Stephen Hester) was strongly opposed to the sale given Citizens’ strategic importance to the overall business model, as well as its strong market share in states on the east coast.
The announcement of a change at RBS’s helm was quickly followed by tentative plans for the sale of a 20-25% stake in Citizens to the public through an IPO no earlier than late 2014. This decision was largely on the lines of what RBS pulled off with its insurance business, which was spun-off partially as the Direct Line group. RBS estimated the value of its Citizens business to be £8 billion.
Now a bid by TD Bank for these operations at the figure estimated by RBS would likely be an attractive option, as it provides a single-step solution to alleviate the pressure on the British bank from its government while bringing in a lump of cash to help ease capital requirement troubles. What remains to be seen is whether TD Bank actually goes ahead with its bid, and if other suitors join the fray to help RBS dispose of the Citizens business over coming months.