Returning RBS To The Private Sector Could Cost UK Government Over £11 Billion

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

U.K. Financial Investments Limited (UKFI), which was set up by the U.K. government in 2008 to oversee the bailout investment in the Royal Bank of Scotland Group (RBS) and the Lloyds Group, recently reaffirmed its plan to sell £3 billion worth of RBS shares by the end of March 2019. This announcement makes it increasingly likely that the U.K. government will go through with its larger plan of selling a chunk of its stake in RBS worth £3 billion in each of the next five years. This is good news for the British banking giant, which has been struggling to return to the private sector since its £45.5 billion bailout in late 2008.

But how long will it take for the UKFI to work its way through all its stake in RBS? And is there any hope of the British government recovering all of the initial taxpayer money? We created a detailed, interactive dashboard for RBS in an attempt to answer these questions using forecasts for just two primary input parameters – the expected annual stake sale value and expected growth in RBS’s share price. Based on the dashboard, we believe that the stake sale will be completed in 2023, with the net loss incurred by British taxpayers being around £11.3 billion (almost 25% of the initial investment, ignoring the impact of inflation).

Notably, this is in sharp contrast to the UKFI’s sale of its stake in Lloyds, which was completed successfully last year at a nominal profit. But it must be noted here that the Lloyds bailout was much smaller (£20.3 billion), and also that Lloyds’ shares recovered to well above the bailout figure of 73.6 pence a share over 2014-15. On the other hand, RBS’s shares have traded largely around 250-350 pence over recent years – well below the bailout figure of a little over 500 pence.

Relevant Articles
  1. Beating S&P500 BY 11% YTD, What To Expect From Travelers Stock?
  2. Up 50% Over The Last 12 Months, Is Hyatt Stock Still Attractive?
  3. Capital One Stock Gained 44% In The Last 6 Months, What’s Next?
  4. Up 8% Year To Date As 5G Gains Traction, What’s Next For Verizon Stock?
  5. Up 32% In The Last 12 Months, Where Is BNY Mellon Stock Headed?
  6. Rallying 30% YTD, What’s Spurring The Rally In Applied Materials’ Stock?

RBS Has Come A Long Way, But Can’t Match The Profits Of Its Former Self

RBS has faced a long list of setbacks on its path to re-privatization over the last decade. The bank reported an annual loss for each year over the nine-year period from 2008-16, even as it worked on reorganizing its once-diversified business model towards retail and commercial banking services in the U.K. and clearing its huge backlog of legacy legal issues. The bank reported its first annual profit in 2017, but with the U.S. mortgage-related lawsuit yet to be settled, it is staring at another potentially huge loss for the current year. But there is no denying the fact that aside from the impending multi-billion dollar settlement with the U.S. Department of Justice (DoJ), things are looking up for the smaller, more efficient RBS.

That said, RBS’s current size and business model cannot generate returns at the levels needed to justify a valuation anywhere near its bailout level. This is very likely what triggered the British government’s decision to begin selling its stake at a sizable rate over the next five years.

So How Will The Stake Scale Pan Out?

Due to a sharp decline in RBS’s share price since the bailout, the UKFI has sold RBS shares on just one occasion in the past – when it sold £2 billion worth of shares in 2015. But the U.K. government intends to sell £3 billion worth of its stake in RBS in the fiscal year 2018, and to also dispose of £3 billion worth of shares each year over 2019-22. Given this plan, it seems likely that it will continue to reduce its stake in RBS by £3 billion each year beyond 2023 too.

With the actual number of shares sold by UKFI depending on the average price of RBS’s shares in a year, we also forecast the change in RBS’s share price over coming years. As shown in the chart below, RBS’s share price has largely increased by ~5% annually over recent years after tanking from over £5 in late 2009 to just £2.23 at the end of 2014. Accordingly, an annual growth rate of 5% over coming years looks appropriate for our analysis.


Based on the two assumptions as detailed above, we estimate that the U.K. government’s stake in RBS will decline from around 71.2% now to below 20% by the end of 2023, before eventually falling to zero by 2026.

Finally, this leads us to the following projections for the U.K. government’s effective loss over coming years. It includes the realized losses from actual stake sales, and any unrealized losses at the end of a year for the remaining holdings. Note that our calculations include the £5.6 billion in payments and special dividend received by the government from RBS.

Disagree with our forecasts? Feel free to arrive at your own estimates for RBS by making changes to our dashboard.

What’s behind Trefis? See How it’s Powering New Collaboration and What-Ifs
For CFOs and Finance Teams | Product, R&D, and Marketing Teams
More Trefis Research
Like our charts? Explore example interactive dashboards and create your own