RBS Announces An IPO To Divest 25% Stake In Citizens

RBS: Royal Bank of Scotland Group logo
RBS
Royal Bank of Scotland Group

Earlier this week, The Royal Bank of Scotland Group (NYSE:RBS) announced its first step towards exiting the U.S. retail banking market by detailing plans to sell a 25% stake in the Citizens Financial Group through an initial public offering (IPO). [1] The U.K.-based banking group will offer 140 million shares in Citizens for between $23 and $25 per share with a 30-day over-allotment offer for an additional 21 million shares. Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS) and JPMorgan (NYSE:JPM) will play important roles in the book-building process.

The increasing pressure on RBS (which is majority-owned by the British government) to focus on its retail and commercial banking operations in U.K. over the last couple of years is no secret. Due to its sizable asset-base, the U.S. retail banking unit figured high on the list of operations RBS was expected to shrink. This in turn led to the bank’s decision last year to sell a 20-25% stake in late 2014 or early 2015 even as it weighed the option of selling the entire business unit to several potential suitors. Notably, the announced stake sale will generate up to $3.5 billion in cash for RBS – valuing Citizens at $14 billion. This is a better deal for the cash-strapped banking group than the rumored £8 billion ($12.8 billion) bid by Canadian banking giant Toronto-Dominion (TD) Bank last October (see TD Bank’s £8 Billion Bid For Citizens Bank Good News For RBS).

We maintain a $13 price estimate for RBS’s stock, which is about 20% above its current market price.

Relevant Articles
  1. Will Johnson & Johnson Stock Rebound To Its Pre-Inflation Shock Highs of $185?
  2. Should You Pick Eli Lilly Stock After A 4x Rise In Three Years?
  3. Down 9% This Year, What’s Next For Lululemon’s Stock Past Q4 Results?
  4. Down 14% In The Last Trading Session, Where Is Adobe Stock Headed?
  5. Will Higher Federal Government Spending, Gen AI Drive Digital Security Stocks Like CrowdStrike Higher?
  6. Up 30% In A Year Is FedEx Stock A Better Pick Over UPS?

See our full analysis for RBS’s stock

RBS arguably underwent the most extensive reorganization among all the global banking giants in the wake of the 2008 economic recession, with the bank reducing total jobs across its operations from 226,400 at the end of 2007 to 113,600 at the end of Q2 2014 – a reduction of almost 50% in six years. While a large part of this downsizing was mandated by the European Commission (EC) as a condition for RBS’s bailout, in recent years it was also driven by a strategic shift from a highly diversified business model to one focused on retail and commercial banking operations in the U.K. due to sustained pressure from the British government.

We detailed the possibility of RBS exiting its Citizens & Charter One businesses in the U.S. back in December 2011. 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. Continued pressure from the government forced RBS to announce a gradual spin-off of the group’s operations in the U.S. early last year, which the bank followed up by filing a request for an IPO with the SEC this May. [2] As you can see from the chart above, Citizens Financial Group (CFG) – which includes the Citizens and Charter One brands – contributes roughly 13% of the group’s total value, according to our estimates.

With the IPO underway, RBS looks set to achieve its target of divesting its stake in CFG completely by the end of 2016. We believe that the decision to exit the business in a phased manner works in the bank’s favor, as expected improvements in interest margins and cost efficiency for CFG over coming months will help RBS realize higher value for its remaining stake in the future.

See More at TrefisView Interactive Institutional Research (Powered by Trefis) | Get Trefis Technology

Notes:
  1. IPO of Citizens Financial Group, RBS Press Releases, Sept 8 2014 []
  2. RBS’s Citizens Financial unit files for U.S. IPO, Reuters, May 12 2014 []