RBS Close To A Deal With UBP For Sale Of Coutts International

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

The Royal Bank of Scotland (RBS) Group (NYSE:RBS) is reportedly close to a deal with Switzerland-based Union Bancaire Privee (UBP) for the sale of its private banking and wealth management business, Coutts International. [1] The British banking giant announced plans to sell the international arm of the Coutts business last August, and formally began taking bids in December. ((RBS launches sale of Coutts, invites bids before Christmas, Reuters, Dec 8 2014)) The point of contention between RBS and UBP holding up the deal is the sale price for the business. RBS had expected as much as $1 billion from the sale last year, but the final price in expected to be between $600-900 million. Coutts International has around $36 billion in assets under management.

RBS is free to explore other potential buyers, including Credit Suisse (NYSE:CS) and a joint investment vehicle funded by Societe Generale and DBS Group. The strong interest in Coutts should help RBS finalize as early as this month, and will mark the latest step by the banking group towards refocusing its efforts on its operations in the U.K.

We maintain a $12.50 price estimate for RBS’s stock, which is about 20% ahead of the current market price.

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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 economic downturn, with the bank reducing total jobs across its operations from 226,400 at the end of 2007 to less than 109,000 at the end of 2014 – a reduction of more than 50% over this period. A large part of this downsizing was mandated by the European Commission (EC) as a condition for RBS’s bailout. However, 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. This was largely due to sustained pressure from the British government.

This is particularly true for Coutts International, as RBS was working hard to grow its Coutts business in late 2011 with global rebranding efforts being the first step of a plan to double the size of the business within several years. ((Coutts to drop RBS Brand, Financial Times, Oct 30 2011)) But the British government’s directive forced the bank to instead split the operations in two – domestic and international – and get rid of the international business. [2] RBS brought in Goldman Sachs to oversee the sale process for Coutts International in October, and began testing the waters for potential buyers with a condition that the “Coutts” brand name will remain with RBS. [3]

Coutts International forms a majority of RBS’s private banking operations, with the unit housing $36 billion of the roughly $50 billion in assets the entire business manages. Our analysis of the bank shows that the sale of Coutts International will reduce the bank’s total value by around $800 million. This is at the upper end of the proposed sale price of between $600 million to $900 million for the unit. RBS will very likely end up with a loss on the sale because of the problems the unit has run into over the last couple of months. Firstly, the sharp devaluation of the Swiss franc made the business less attractive – significantly hitting its potential value. Also, German authorities recently began investigating Coutts International, which has its headquarters in Switzerland, for alleged tax evasion. [4] The unit is also under the scanner of U.S. tax authorities. RBS sought to ensure that legal liability does not weigh against the deal by promising to indemnify the buyer from any legal costs, but this no doubt will have a negative impact on the final value.

You can see how a sale affects our price estimate for RBS’s stock by making changes to the chart below, which captures the total assets managed by the group’s private banking business.

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Notes:
  1. RBS Said to Favor UBP as Buyer for Coutts International, Bloomberg, March 13 2015 []
  2. RBS confirms it’s considering sale of Coutts’ international arm, Reuters, Aug 11 2014 []
  3. RBS ‘will stop Coutts International buyer using brand’, The Telegraph, Oct 3 2014 []
  4. Coutts’ Swiss operation faces German investigation over tax evasion claims, The Guardian, Feb 26 2015 []