RBS Set To Shrink Stake In Citizens To Below 50%

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

The Royal Bank of Scotland Group (NYSE:RBS) announced plans to cut its stake in the Citizens Financial Group to under 50% early Monday, March 23. [1] In what will be the second phase of the U.K.-based banking giant’s plan to exit retail banking in the U.S., RBS will sell 115 million shares in Citizens with a 30-day over-allotment offer for an additional 17.25 million shares. The move comes six months after RBS spun off Citizens with the sale of a 28.5% stake through an IPO last September (see RBS Announces An IPO To Divest 25% Stake In Citizens). [2]

Once RBS gets rid of these shares, its stake in CFG will decline to no more than 49.3%. This brings RBS (which is majority-owned by the British government) one step closer to its mandate of focusing on its retail and commercial banking operations in U.K. The announced stake sale will be facilitated by Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS),  JPMorgan (NYSE:JPM) and Citigroup (NYSE:C).

We maintain a $12.50 price estimate for RBS’s stock, which is about 15% above its 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 2008 economic recession, with the bank reducing total jobs across its operations from 226,400 at the end of 2007 to 109,000 at the end of 2014 – a reduction of more than 50% over this period. 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 and 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. in early 2013, which the bank followed up by filing a request for an IPO with the SEC last May. [3] 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.

The proposed stake sale puts RBS right on track towards achieving its target of a complete exit from CFG by the end of 2016. Assuming that the book-runners exercise the over-allotment option in full, as was seen during the IPO, RBS would have effectively cut its stake in CFG to 46.1%. 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.

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Notes:
  1. Intention to Sell Part of Citizens Financial Group, RBS Press Releases, Mar 23 2015 []
  2. RBS sells shares in Citizens to banks underwriting IPO, Reuters, Sept 28 2014 []
  3. RBS’s Citizens Financial unit files for U.S. IPO, Reuters, May 12 2014 []