U.K. Faces Reckoning Over RBS Bailout

By Max Colchester

LONDON--In the weeks after Brexit, U.K. Treasury officials began to reassess the value of the nation's 73% stake in Royal Bank of Scotland Group PLC. The market's answer: substantially less than before.

RBS was saved with GBP45.5 billion ($59 billion) of taxpayer money in one of Europe's biggest bank bailouts. The value of that stake has shriveled since the 2008 rescue, and the vote to leave the European Union has hammered another nail into the coffin for hopes of a face-saving privatization.

Nearly a third of RBS's market value has been wiped out since Brexit, more than any other major U.K. bank. The British government plans to sell GBP25 billion of RBS shares in the next four years. But that is built on an optimistic assumption, because its entire RBS stake is currently worth only about GBP15 billion.

Like its peers, RBS's stock was pummeled by a Bank of England decision to cut interest rates after the EU referendum, looming fines and worries of a slowing economy. "Few banks have been more affected by Brexit," says Barrington Pitt Miller, a bank analyst at Janus Capital.

RBS executives and investors have long argued the bank should be privately held, but the U.K. Treasury is now swamped by a bigger problem -- negotiating the actual Brexit. Executives at UK Financial Investments Ltd., which manages the government's stakes in the British bailed-out banks, has been in touch with Treasury officials but have yet to meet the new Chancellor of the Exchequer Philip Hammond, according to people familiar with the matter. A plan to sell part of a 9% stake in Lloyds Banking Group PLC is also on hold.

The Brexit sucker punch landed just as RBS was half way through a five-year plan to shed several businesses and leave a profitable U.K. retail and corporate franchise. But that strategy factored in neither long-term rock-bottom interest rates nor the cost of reaccelerating restructuring plans. Brexit is likely to trigger both, and in the process delay proposals for share buybacks or dividend payments.

In August RBS Chief Executive Ross McEwan warned that hitting 2019 financial targets of a 12% return on equity will "now likely be more challenging" and said plans will be presented in February to slice more cost out the business. During a radio show the New Zealander said that Brexit could push the bank's privatization back another two years.

The post-Brexit cut to U.K. interest rates is pinching RBS's profits, yet the bank can't pass on the full scale of the rate cut as many of its depositors are companies who are already being paid no interest. Mr. McEwan blamed lower rates for the collapse of a GBP1.5 billion plan to float over 300 branches which must be shed as a condition of RBS's bailout. On Tuesday he warned RBS may not be able to meet the 2017 deadline for the sale, raising the prospect of a fine.

RBS's headquarters are in Scotland, which has threatened to leave the U.K. if Brexit happens. Relocating to England will be expensive, analysts say. RBS also has a bank in Ireland, whose economy is expected to be disproportionately hit by a U.K. exit from the EU.

Litigation is another risk. On Tuesday RBS agreed to pay $1.1 billion to a U.S. regulator to resolve two civil lawsuits over the way it sold mortgage-backed securities in the run-up to the financial crisis. Discussions to settle with two other agencies, including the Justice Department, are under way. The penalties could top the $5.6 billion the bank has so far put aside.

RBS's shares are down 42% for the year and 30% since Brexit. Its balance sheet has been cut by more than a trillion pounds since its bailout, which partly explains the collapse.

For years, RBS's privatization was on the front-line of a political brawl which sucked in parties ranging from the prime minister to the archbishop of Canterbury. The government eventually urged RBS to ditch its international and investment banking operations to focus on the U.K.

Some analysts say the government should accept a big loss and move on. The Treasury bought RBS shares at an average price of GBP5--they now trade at GBP1.77. "I can plug any number into my models and I will never get to GBP5," says Chirantan Barua, an analyst at Bernstein Research.

In November the U.K.'s Office of Budget Responsibility may slash how much the government can expect to get from RBS share sales. This could push up the country's predicted net debt levels.

Meanwhile RBS is launching a rebranding exercise. A black-and-white TV ad to be aired during prime-time, shows people committing good and bad deeds. "We are what we do," the ad's tagline says.

Write to Max Colchester at max.colchester@wsj.com

(END) Dow Jones Newswires

September 28, 2016 06:30 ET (10:30 GMT)

Royal Bank of Scotland (NYSE:RBS)
Historical Stock Chart
From Mar 2024 to Apr 2024