Royal Bank of Scotland Group Plc, Britain’s biggest government-owned bank, may use surplus capital to buy back part of the taxpayer’s holding, said two people with knowledge of the situation.
RBS and the government are considering the proposal after the bank’s shares rose last week, giving the Treasury a paper profit on its stake, said the people, who declined to be identified because the talks are private. The U.K. may also sell part of its 45.5 billion-pound ($70 billion) stake in Edinburgh- based RBS to money managers, the people said.
“This is something that a lot of the banks, which have been cash-flow positive have done, including the ones in America,” said Ralph Silva, an analyst at London-based Silva Research Network. For RBS “to make this work they need to sell some of their assets so they have the funds to buy themselves out of this situation.”
A buyback would help the British Exchequer cut the country’s 152.8 billion-pound deficit, the biggest since World War II. The U.K. government has made a paper profit of about 5 billion pounds on its investment in RBS after the shares rallied 91 percent this year. Taxpayers own 84 percent of the lender.
Linda Harper, an RBS spokeswoman, declined to comment as did a spokesman for UKFI, which manages the government’s holdings in the bank.
RBS, which last posted a profit in 2007, accumulated losses of 27.9 billion pounds over the past two years following its acquisition of ABN Amro Holding NV under former CEO Fred Goodwin.
The bank is seeking to raise cash by selling assets including 318 branches in the U.K., Global Merchant Services, a card-payment processing business, and its insurance division, as part of an agreement with the European Union for receiving a government bailout in 2008 and 2009.
RBS may have 15.3 billion pounds of surplus capital by 2012 as the lender sells assets and closes operations, Michael Helsby, a London-based analyst at Bank of America Merrill Lynch said in a note to investors this month. Share buybacks are a “likely outcome,” he wrote.
If RBS had too much capital injected “at the bottom of the cycle, we think it would not be unreasonable to take the capital out when it is confirmed,” wrote Helsby in London who has a “buy” rating on the stock.
Analysts have upgraded forecasts for RBS on the expectation that profit margins will increase this year and impairments will drop. RBS will issue a first-quarter trading statement on May 7, the day after Britain’s general election.
Edinburgh-based RBS climbed 3.6 percent to 55.8 pence in London. The bank is trading about 12 percent above the 49.9 pence average price paid by the government.
The U.K. government has a paper profit of around 1.3 billion pounds on its 20.3 billion pound investment in Lloyds Banking Group Plc.