U.K. Government Could Book A Loss Of £3 Billion If It Goes Ahead With RBS Stake Sale

The British government is reportedly keen on selling a chunk of its stake in the Royal Bank of Scotland Group (RBS) worth £3 billion in the near future – a move that comes more than three years after a £2 billion stake sale in 2015, and will put RBS back on its path to re-privatization. The British government holds a 71% stake in the banking giant – having bailed it out in late 2008 by pumping in £45.5 billion of taxpayers’ cash – and had been waiting for RBS to settle its legacy U.S. mortgage-related lawsuit before restarting a stake sale. With RBS successfully putting the legacy issue to rest for a much-lower-than-expected $4.9-billion figure last month, the bank finally cleared that hurdle.

However, the sharp decline in value for European banks over this week from the political uncertainty in Italy is bad news for the British government. RBS’s shares currently trade at around 275 pence apiece – roughly half the bailout figure of a little over 500 pence. Considering the large size of the stake that is expected to be sold, the average realized price for the stake sale is likely to be lower – in the 250-260 pence range – if it happens in the near term. This represents a loss in the range of £2.8 billion to £3 billion for the U.K. government on the stake sale.

Additionally, as detailed in our interactive dashboard for RBS, a plan to sell a £3-billion stake each year would take the British government six years to wind down its entire stake, with the net loss incurred by British taxpayers being around £11.3 billion (almost 25% of the initial investment, ignoring the impact of inflation).

U.K. Government Appears Resigned To The Fact That It Won’t Recoup Entire Bailout Amount

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. Although the bank did well to report its first annual profit in 2017, and looks poised to remain profitable going forward, factors like Brexit and an overall slow outlook for Europe are expected to weigh on RBS’s near- to mid-term earnings growth rates. In any case, RBS’s current size and business model cannot generate returns at the levels needed to justify a valuation anywhere near its bailout level in the foreseeable future. Accordingly, now seems to be as good a time as any for the government to start cutting its stake.

Average Selling Price And Realized Loss

As the British government targets selling shares worth £3 billion, the actual number of shares it will end up selling will depend on the average selling price it realizes. The table below highlights the changes in key metrics, and the realized loss, for different average selling price per share. It should be noted that the British government currently holds 8.4 billion RBS shares – representing a stake of 71.2%.

As seen here, the British government’s realized loss figure could range from £2 billion to £3 billion depending on whether it sells a share for 250 pence or 300 pence apiece. As the same time, a lower selling price per share would also mean a greater reduction in the British government’s stake – leaving a smaller share for it to sell later.

As we detailed above, given the soft equity market conditions, the loss is likely to be in the £2.8 to £3 billion range, with the British government’s stake shrinking to roughly 61.3%

A Quick Look At The British Government’s Effective Loss Over Coming Years

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. Also, we assume that RBS’s share price will increase annually by 5% over coming years. 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. 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.

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

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