As part of its initiative to gradually offload the stake in The Royal Bank of Scotland Group plc RBS, the UK government raised £2.1 billion ($3.3 billion) on its first sale of 5.4% stake on Tuesday. The UK Financial Investments, which manages government holdings in banks, stated that the sale will now reduce the government’s holding from around 78.3% to around 72.9%.
The Treasury sold the stake at 330 pence per share, much below the purchase price of 502 pence it paid when it bailed out the bank amid the 2008 financial crisis. This move translated to a loss of around £1.1 billion.
However, according to sources, there was strong demand from investors within hours of commencing the sale process wherein shares were placed for sale to institutional investors through an accelerated bookbuilding process.
Citigroup Inc. C, The Goldman Sachs Group, Inc. GS and Morgan Stanley MS served as bookrunners for the offering.
It seems that the UK economy is gradually recovering from the global credit crunch, instilling the government’s confidence in privatizing RBS. Finance Minister George Osborne stated, “This is an important first step in returning the bank to private ownership, which is the right thing to do for the taxpayer and for British businesses: it will promote financial stability, lead to a more competitive banking sector, and support the interests of the wider economy. Now is the time for RBS to rebuild itself as a commercial bank, no longer reliant on the state, but serving the working people of Britain.”
As Osborne’s Conservative Party won the national election in May, he has been pressing for an accelerated stake sale of RBS. He intends to sell around £25 billion of RBS shares by 2020. The money raised will be utilized in paying down national debt.
However, the Opposition Labour party seems to be disappointed with the move. Its finance spokesman, Chris Leslie mentioned, “RBS had to be bailed out urgently, but it doesn’t have to be sold off at the same speed,". Leslie further added "The Chancellor (Osborne) needs to justify his haste in selling off a chunk of RBS while the bank is still awaiting a U.S. settlement for the mis-selling of sub-prime mortgages.”
Nevertheless, pleased with the commencement of the sell down process, Ross McEwan, the CEO of RBS said, “It's an important moment and reflects the progress we are making to become a stronger, simpler and fairer bank.”
What Might have Prompted Sale at Loss
The initial stake sale resulted in a loss for tax payers, and if the government sells its entire stake at the current sale price, it will lead to a loss of around £15 billion.
Though Osborne defended the loss on the sale on grounds of improvement in the broader economy, perhaps the government is apprehensive about the the underlying risks of holding RBS for a longer period and hence initialed the sale process to limit its loss. The government seems to have recognized the uncertainty regarding fully returning taxpayers’ money as RBS is currently trading at a much lower price than the bailout purchase price.
RBS currently carries a Zacks Rank #3 (Hold).
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