Can anyone, apart from some politicians, who thinks that the taxpayer will ever get all its money back for the bailing out of Royal Bank of Scotland (LONDON:RBS), please raise their hand now?
No, I didn’t think so, but this still doesn’t adequately explain the timing behind last night’s announcement that the UK government is paring down its 78% stake in the bailed out lender by 5%, at a time when markets are fairly quiet, and volumes low.
Putting to one side the fact that the UK government at the time paid over the odds for the bank, the beginning of the sale process was always going to be politically toxic.
Unsurprisingly the main criticism has been that the sale is being done at a significant discount to the purchase price, but realistically that was always going to be the case, given that on an adjusted basis the peak in the share price in 2007 sits at 6,071p.
The peak this year currently sits at 414p, which equates in old money to 41.4p before the 10 for 1 stock consolidation we saw in June 2012. The share price is currently sitting just above one year lows and the lows this year at 326p, but since the beginning of 2013 the share price has gone pretty much nowhere, which is a pretty poor return by anyone’s standards,
The recent return to profitability may have helped push forward the decision making process after the bank announced a 27% rise in net profits for Q2 last week, but the fact remains that there is billions of taxpayers’ money tied up in a bank not generating a return, that could be put to better use.
The banking sector does appear to be showing signs of turning itself around and freed from the dead hand of political control the bank is more likely to show signs of recovery if it is freed from this particular anchor.
The bank continues to sell off assets as it continues to cut down its stake in US operation Citizens with another $2bn sale announced last week.
Litigation costs are likely to continue to be a drag on profitability for some time to come, with US regulators looking into mortgage mis-selling, but the bank continues to restructure its operations with a more domestic focus and it is likely to be more successful in doing that without the UK government peering over its shoulder.
The start of the disposal process may well have fired the starting gun on the re privatisation process, but the process still has a long way to go before being complete.
Maybe subsequent stakes may well yield a higher return for taxpayers, but waiting and hoping for a distressed asset to come back into break even territory is no way to generate the best return.
Better to free up the capital in the coming weeks and months and put it to better use.
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