RBS can be privatised within a year, says the bank's chairman

 

Royal Bank of Scotland, the giant ailing bank 82% owned by taxpayers, is on the mend - if not quite mended.

For the first three months of the year, it made a profit at the operating level, before tax and after tax, which may be a unique occurrence since the crash of 2008.

And although its pre-tax profit of £826m is less than it ought to be generating on a quarterly basis, given the size of its balance sheet and market share, it is a considerable improvement on the £1.5bn loss it made for the comparable period last year.

There has even been a modest increase in its net lending to small businesses, after years of being criticised for shrinking this lending - which RBS's chairman Sir Philip Hampton attributes in part to the Bank of England's provision of cheap funds through the Funding for Lending Scheme.

So RBS believes that during the course of next year, it will have shed most of its toxic residual assets and will have completed its reconstruction.

Start Quote

Next month, Mr Osborne may come under pressure to break up RBS into a so-called good bank and bad bank”

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This means, says Sir Philip, that as of the middle of next year - and possibly earlier - RBS will be in a fit enough state for the government to start selling its huge stake, to begin the process of privatisation (see him saying this here on the RBS website).

The unmissable implication is that Sir Philip would dearly love the government to do that.

What Sir Philip and his chief executive, Stephen Hester, can't control is what happens to RBS's share price - which will have a big bearing on whether the Chancellor, George Osborne, wants to start the privatisation.

The terrifying point for Mr Osborne is that if he sold the whole of taxpayers' stake in RBS right now, an eye-popping loss of £18bn would be generated for the state - and the loss would only be a bit less if measured by reference to the carrying value of the shares in the government's books, rather than what the Treasury, under the previous chancellor, Alistair Darling, actually paid for them.

Under pressure

One highly sensitive and contentious political and investment question is whether the prospects for taxpayers getting all their money back would be enhanced if the government took permanent ownership of RBS's residual stinky assets, ran them down over the next decade, and only privatised a completely cleaned up bank next year (see here for more on this).

Next month, Mr Osborne may come under pressure from the Parliamentary Commission for Banking Standards he created to break up RBS into such a so-called "good bank" and "bad bank". That may irk him because hitherto he has been keen not to keep on his books what remains of RBS's more poisonous assets, likely to have a written-down value of around £40bn by the end of the year.

But the outgoing Governor of the Bank of England, Sir Mervyn King, believes that such financial engineering would improve the prospects for what he sees as a liberation of RBS back into the private sector.

Sir Mervyn would also argue that so long as the Treasury kept RBS's stinkier assets long enough, and felt under no pressure to get rid of them in a fire sale, taxpayers would even end up (more than likely) making a profit on these putrid loans and investments.

UPDATE 11:05

So if the government were to start the unwieldy process of privatising RBS (which would almost certainly be the biggest privatisation in UK corporate history), what price would it need to receive for the shares to avoid a loss?

Unfortunately, this is not the easiest question to answer.

According to UKFI, which manages the government's stakes in the banks, the price actually paid by the Treasury for its 82% stake was 502p per share.

However the valuation in the government's books is 407p per share - a fairly chunky difference.

That lower "book" value captures a loss that the government has already absorbed on the investment: the loss is the difference between what the government paid for the shares and the market price of RBS on the days the then Chancellor, Alistair Darling, actually handed over the money for the shares.

But 407p isn't likely to be seen by the National Audit Office, the watchdog that is supposed to prevent the government wasting taxpayers' money, as the true book value of the government's stake.

That is because the 407p valuation is thought to include too low a valuation for something called the "dividend access share", which gives the government enhanced dividends compared with other shareholders and needs to be bought out by RBS prior to privatisation.

So if we are going on "true" book value, that could be as high as 440p.

Or to put it another way, George Osborne has a choice of three numbers for the price he would need to receive for RBS shares to prevent a loss for taxpayers, 407p, 440p and 502p.

Most investment purists would see the correct number as 502p.

If the chancellor were to ape the often cynical behaviour of big companies when faced with similar accounting dilemmas, he would probably choose the lowest possible price - of 407p.

So politics being what it is, I suspect he will claim success if he can get 440p.

All of which may seem a bit academic right now, with RBS shares massively underwater, as they say, at 290p. Or to put it another way, the notional loss for taxpayers today on their 82% stake in RBS is a maximum of £20bn and well over £10bn on any valuation.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 233.

    Ah lets get one thing right here, the bailout was under a Labor government, who also shoved us into massive debt - so trying to hang the party now in power is very wrong and totally bias. It is great to blame the incumbents however check a bit of history before shaking a finger at anyone.

  • rate this
    +1

    Comment number 232.

    Mr Osbourne needs money for a pre-election give away. The bank will be sold off, without being split into a 'good' bank and a 'bad' bank, and without getting the best value for the tax payer, because Conservative political advantage is more important.

  • rate this
    +1

    Comment number 231.

    40 Cynicall_Sid

    'The taxpayer has suffered the pain since the institutional crash in 2008.'

    Naaah. If the taxpayer had suffered the pain then we'd all be paying 50% tax.

    The ones who have suffered the pain are the savers who have watched the government print 300bn+ and borrow another 500bn+ since 2008 thus trashing the currency and wiping out the value of their savings through inflation.

  • rate this
    +2

    Comment number 230.

    Of course the tax payer will loose out. This government will cut and run if their mates in the city can make a quick buck. They will probably be in on the deal already.
    The rich get richer the poor poorer. That's because the poor don't pay.

  • rate this
    +1

    Comment number 229.

    So we bail out these lunatics who gambled with all OUR MONEY and now some mega rich person will pay for it and reap the benefits. Typifies this money grabbing government. And which one of this government's cronies is going to make even more money? Hmm. And they say crime doesn't pay? Well it does for this hypocritical cesspit that calls itself a government!

  • rate this
    +2

    Comment number 228.

    Bonuses seem to get paid even when the business isn't in profit, this is wrong. Other businesses pay bonuses when they make profits above and beyond targets.

  • rate this
    +2

    Comment number 227.

    The bank needs to pay us the taxpayer back before it's sold. This isn't a nice little bung for the Conservatives to use before the next election to buy votes at our expense.It's owned by us not by Mr Cameron and his Eton chums and the the the goverment have a duty to act in our best interests, NOT THEIR OWN POLITICAL INTERESTS.

  • rate this
    +3

    Comment number 226.

    Future generations will look back at this era with amazement at how thieves stole billions from the public with the full support of multiple political parties.

    They will be told how a failed bank was saved by taxpayers but, instead of using it as a benchmark to pit privately owned banks against, the Government took a big loss and ensured the status quo continued!

  • rate this
    +3

    Comment number 225.

    Waste what is left on a pathetic attempt at political bribary - you know it makes sense - to the morally corrupt.

  • rate this
    +1

    Comment number 224.

    I can see why the government at the time bailed RBS out, however it may have been better to let them go to the wall and rebuild with the money spent on them.

    I will never get a bailout as I am an individual and other companies have been let to fester, it is one way or the other - socialistic or capitalistic and there is no way that as tax payers we should lose out on this deal.

  • rate this
    +1

    Comment number 223.

    I agree with those who say the Govewrnment should sell the shares only when they can make a profit. Of course, in the same way we weren't asked whether we approved of bailing out RBS in the first place we won't have any say in when/at what level the shares are sold. But you can bet your bottom dollar that the Government will claim a triumph at whatever price the shares are sold for!

  • rate this
    +3

    Comment number 222.

    keep it

    run it properly

    moderate the bonuses

    perhaps sell it one day

    but only when it has paid all the money back with interest!

  • rate this
    +2

    Comment number 221.

    @220.purple
    "Would you give RBS a mortgage?"

    If I were corrupt and demented? Oh yes. I get interest on the loan at *my interest charges* and failure to pay means I get ownership of the real estate on the depressingly greedy basis that the government has plans to prop up prices anyway indirectly through their first buyer scheme.

  • rate this
    +1

    Comment number 220.

    It was a hefty sum of money given to...... someone or other in exchange for a slice of the bank. We are told that £40bn at risk may be written down or off, none of it mine. Would you give RBS a mortgage?

    Problems are ongoing King has given opinion. No one would be interested in the proposition as is. Ongoing share trading is amusing. Duck, and a dead one at that after several years already.

  • rate this
    +2

    Comment number 219.

    203.prudeboy
    The John Lewis partnership works by being able to buy stuff cheaply from their suppliers.
    -
    John Lewis Partnership works by being owned by its employees rather than shareholders. It's a mutual, wherein all members of staff benefit from its success by sharing in its profits, instead of just the senior management.

  • rate this
    +1

    Comment number 218.

    @215.zaki999
    "i don't understand why the government is using taxpayers money to bail out large corporations."

    It doesn't and it never has. The problem is the way this funding operates. A private "vehicle" is used to handle the affairs, the govt. if required can get money via bonds from BoE to fund the vehicle. This is still not taxpayer money, but *you* have no choice but to underwrite the risk.

  • rate this
    +1

    Comment number 217.

    The miscreant bankers' noses are twitching with the scent of easy money and are now angling to pick up RBS on the cheap so that they can start the bandwagon of mal-practices and mis-selling all over again. Watch the share price soar! The taxpayers should get back every penny, even if this means putting a charge on any future share price rises.

  • rate this
    +1

    Comment number 216.

    Given the scale of the investment by the British taxpayer, it seems unbelievable to suggest that the first return to profitability should imply the prompt sale, at a loss, of the British taxpayer's share.

    Not only that but they want to leave us with the toxic assets they amassed in a so called 'bad-bank'. Just goes to show how grateful they are to us for bailing them out in the first place.

  • rate this
    +2

    Comment number 215.

    i don't understand why the government is using taxpayers money to bail out large corporations. we voted for them to run the country not be investment bankers. and if it is in the public interest to bail these companies out, why do their senior staff still receive massive bonuses?

  • rate this
    +3

    Comment number 214.

    @153.spindoctor
    "You would never know that RBS is supposed to be owned by the People of the UK."

    Because it isn't. "We" have less control over RBS than "we" do the Bank of England.

    It wasn't "your" money that propped it up, but "you" are expected to cover the shortfall.

    The whole situation regarding the supposed nationalisation (sic) of these banks stinks like a dead woodchuck under the porch.

 

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