RBS Damps Speculation of Immediate Sale as Aid Repaid
Stock Chart for Royal Bank of Scotland Group PLC (RBS)
Royal Bank of Scotland Group Plc damped speculation of an immediate sale of the government’s stake in the bank after the lender said it’s poised to repay the last of the emergency loans received in its bailout.
“There is no desire to sell at the current share price,” Chief Executive Officer Stephen Hester told reporters as the lender posted a 4 percent increase in first-quarter operating profit today. “While I think everyone is focused on that being the desired end game, I’m not aware of anything imminent.”
The repayment of 164 billion pounds ($265 billion) of emergency aid it received from the U.K. and U.S. governments by will remove an obstacle to the lender’s return to private ownership. The bank still has to exit a government program that insures its riskiest assets, start paying dividends on ordinary stock, and boost the stock price. RBS trades at less than half the level at which the taxpayer bought its 82 percent stake for about 45.5 billion pounds.
“It’s in the government’s interests to wait until there’s a much higher dividend prospect in the hope that has a positive impact on the share price,” said Neil Smith, an analyst at WestLB AG in Dusseldorf who rates RBS a buy. “There’s a small probability the government may try to sell a small stake at a loss, but the likelihood of that happening looks more remote.”
The shares fell 0.3 percent to 24.47 pence in London trading, for a market value of 27.1 billion pounds. The stock has jumped 24 percent this year, fueling speculation the government may sell part of its stake for less than the average 50.2 pence a share it paid for it.
The U.K. could start selling its stake in RBS at a loss, Jim O’Neil, chief executive officer of U.K. Financial Investments Ltd., the body that manages the government’s holding in the bank, told lawmakers on March 14. The government has also made presentations to potential investors, including Middle Eastern sovereign wealth funds, about a sale of its stake, two people familiar with the matter said in March. The talks are still at an early stage, the people said.
RBS said it will resume discretionary dividend payments to preference shareholders after a European Union ban expired at the end of April. The plan will cost 350 million pounds in 2012. The Edinburgh-based bank still has to repay the government’s access share, which was created in 2009 and gives the taxpayer priority over ordinary shareholders.
Ordinary shareholders may have to wait at least a year for dividends because regulators in the U.K. and the U.S. are pushing banks to bolster capital as the latest round of rules set by the Basel Committee on Banking Supervision are implemented, Hester said today.
“We are very clear one of the manifestations of the end state of RBS is we should be a strong dividend payer,” the 51- year-old said. “The issue is how we get there.”
Hester, who has said his job is equivalent to defusing the “biggest time bomb in history,” has shrunk assets by more than 700 billion pounds and cut more than 35,000 jobs since he took over from Fred Goodwin in 2008.
Operating profit rose 1.18 billion pounds in the first quarter from 1.13 billion pounds in the year earlier period, RBS said in a statement today. That beat the 917 million-pound median estimate of six analysts surveyed by Bloomberg.
Loan impairments at the bank fell 32 percent in the quarter to about 1.3 billion pounds from the year-earlier period after souring bad loans at the so-called non-core unit shrank 52 percent to 499 million pounds, RBS said.
“RBS has made enormous progress and they are delivering on what they said they would,” said Ian Gordon, an analyst at Investec Securities Ltd. in London. “The balance sheet metrics are very impressive.”
Revenue at the securities unit slipped 18 percent to 1.73 billion pounds as income from credit markets dipped 27 percent and that from asset-backed securities dropped 31 percent. Operating profit at the bank’s consumer unit fell 7.9 percent to 477 million pounds, while operating profit at the corporate unit slid 20 percent, RBS said.
The bank’s net loss increased to 1.52 billion pounds in the first quarter from 528 million pounds as the bank took a 2.5 billion pound accounting charge on fluctuations in the value of its own debt. So-called credit valuation adjustments require banks to book losses when the value of their debt rises, and gains when it declines, on the theory that a loss, or profit, would be realized were the bank to repurchase that debt.
RBS took about 52 billion pounds from the U.S. Federal Reserve, 75 billion pounds of loans and guarantees from the U.K. Credit Guarantee Scheme and the Bank of England’s Special Liquidity Scheme and 36.6 billion pounds from the central bank’s Emergency Liquidity Scheme. The SLS was introduced at the peak of the credit crisis to allow banks to swap hard-to-trade mortgage-backed securities for government bonds while the CGS was designed to ensure short-term liquidity. All of these will be repaid by the end of the month, RBS said today.
RBS still has about 120.8 billion pounds of assets covered under the government’s Asset Protection Scheme, which it intends to exit in the fourth quarter. The program, started in 2009, allows the bank to insure its most toxic loans against default in return for a fee. RBS said it has set aside 2.5 billion pounds to cover the costs of the APS.
RBS followed Lloyds Banking Group Plc (LLOY) and Barclays Plc (BARC) in increasing the amount it is putting aside to compensate customers who were improperly sold payment protection insurance. The bank earmarked an additional 125 million pounds after taking an 850 million-pound charge last year. That was less than the increase of between 200 million pounds and 300 million pounds, as estimated by three analysts in a Bloomberg News survey.
Lloyds this week took an additional 375 million-pound PPI charge after a 3.2 billion-pound hit last year while Barclays last week set aside an additional 300 million pounds for compensation after a 1 billion-pound charge last year.
The insurance of payments on credit cards and mortgages, in case of illness or unemployment, was improperly sold by the biggest U.K. banks. Clients who bought the policies rarely compared prices or terms and sometimes were not covered.
The lender’s loss-making Ulster Bank unit continues to face “exceedingly difficult market conditions,” RBS said in the statement. The loss decreased to 310 million pounds in the first quarter from 365 million pounds on impaired mortgages. RBS injected as much as 800 million pounds into the unit in the first quarter on top of the 10 billion pounds it has pumped in since 2008.
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