George Osborne is about to take a decision that will help determine his legacy. While the fastest growth since 2010 is boosting voter confidence in his stewardship of the U.K. economy, his ruling on the future of Royal Bank of Scotland Group Plc may yet mar that achievement.
The chancellor of the exchequer is set to announce as soon as this week if he’ll split up RBS, rescued from collapse in 2008 and 2009 in the world’s largest banking bailout, and spin off its toxic assets. With 18 months to the next election, Osborne’s biggest challenge may be convincing voters he’s made the right choice in seeking to recoup the 45.5 billion-pound ($73 billion) cost. He and other ministers were forced this month to defend the sale of another asset, Royal Mail Plc. (RMG)
“In terms of legacy, it’s quite important and it needs to be managed carefully,” Stewart Robertson, an economist at Aviva Investors Ltd, in London, which has about $438 billion under management, said in a telephone interview. “There’s still a little bit of a lynch-mob mentality about RBS. He’ll want to be seen as the chancellor who guided the bank back to health and did right by the taxpayers, while giving RBS room to heal.”
The decision will come just weeks after the government sold part of its stake in Lloyds Banking Group Plc (LLOY), netting it a profit of about 60 million pounds ($97 million). Osborne has previously said that RBS was still too weighted with poor assets to be sold.
Parliament’s cross-party banking commission said in a report in June that the government should consider breaking up RBS, which is 81 percent state-owned, to speed up its privatization. That prompted Osborne to commission a report into its structure by Rothschild, BlackRock Inc. and Slaughter & May LLP. Two months later, Fitch Ratings said the costs of breaking up RBS would outweigh the benefits.
Osborne said on Oct. 22 he would make up his mind on RBS in the next couple of weeks, calling it “the next big decision in my in-tray” and that “it’s clear to me that we do need to address some of the problems” at the lender.
A strengthening economic recovery and improving public finances have helped cement Osborne’s credibility and boosted support for his Conservative Party, according to recent opinion polls. That may give him leeway to allow RBS further time to recover, according to Christopher Wheeler, a banking analyst at Mediobanca SpA in London.
“With growth predicted for next year and Lloyds off the table, he has the ability to be a bit less interventionist,” Wheeler said in a phone interview. “He’ll be able to say ‘I got the risk off the table and I got RBS on a much firmer and faster course’ to move it forward in the next Parliament. He also needs the City to know that the hand on the tiller is much lighter now.”
Government data on Oct. 25 showed that gross domestic product grew 0.8 percent in the third quarter, the most since 2010, as the recovery continued across all main industries. That prompted Osborne to say that “people can begin to see” that the government is fixing the country’s economic problems.
A YouGov Plc poll conducted on Oct. 16-17 showed that a single-party Tory government led by Prime Minister David Cameron would be the most widely trusted on the economy, more than a renewed coalition with the Liberal Democrats or a Miliband-led Labour administration.
Still, Labour questioned the government’s handling of the initial public offering of Royal Mail, the state postal service. Shares in the company, which were sold at 330 pence after being oversubscribed by institutional and individual investors, traded at 534.50 pence yesterday.
Analysts say going for the middle ground on RBS may prove safer for the chancellor, as it would maximize value for the taxpayer when the bank is eventually returned to private hands.
“I don’t know a single investor who thinks good bank, bad bank is a good idea,” Ian Gordon, an analyst at Investec Ltd. in London. “Some form of internal reorganization, with some divestments, is a much safer bet from Osborne’s perspective. Delaying that recovery process would be damaging and materially adverse for shareholders, and therefore for taxpayers.”
In an interview in June, Cameron said voters are more interested in getting their money back from RBS than in its quick return to the private sector.
RBS has lost more than 90 percent of its value since the end of 2006, the year before its then chief executive officer, Fred Goodwin, led the 72 billion-euro ($115 billion) purchase of Amsterdam-based ABN Amro Holding NV. Goodwin was stripped of his knighthood in January 2012 after a government committee deemed he could not retain an honor awarded for services to banking.
Owning RBS has also made the government vulnerable to criticism over bankers’ compensation, lending to companies and the manipulation of benchmark interest rates. Labour has attacked Osborne for allowing RBS to pay executive bonuses and failing to police the investment bank.
“RBS is still very much on the naughty step,” said Robertson at Aviva. “Osborne is likely to say the bank will stay in the public sector for quite a while. But whatever is done it needs to look sensible and prudent.”
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