The U.K. government may sell its stake in Lloyds Banking Group Plc before its Royal Bank of Scotland Group Plc holding through share buybacks and a special dividend, Mediobanca SpA analysts said.
The government could be paid the dividend by London-based Lloyds from earnings over the next eight years, and the bank could buy some taxpayer-owned stock to minimize any loss on the bailout, the analysts, led by Christopher Wheeler, wrote in a note to clients today, initiating coverage of both banks.
Shares in each bank are trading at just more than half what the government paid for them at the height of the financial crisis. RBS fell 2.7 percent to 267.1 pence, and Lloyds declined 2.5 percent to 38.9 pence yesterday.
“The sale will have to satisfy political requirements as well as the usual market and commercial requirements,” the analysts wrote. “The sales of any of the stakes below entry price, even as a strategy of creating market tension ahead of sales at a higher price, will attract criticism in the media and from whichever party is in opposition.”
Lloyds may be sold before RBS because the government owns less of the bank, and the lender has said it will more quickly ring fence its consumer bank as recommended by the Independent Commission on Banking, Wheeler said.
The U.K. bought its 82 percent stake in RBS for an average 502 pence a share, taking into account the Edinburgh-based bank’s recent reverse stock split, and bought Lloyds’s stock at 73.6 pence apiece for a 40 percent stake in 2008.
Lloyds will have 18.5 billion pounds ($30 billion) of cash to distribute by 2020 from profits, less equity retained to meet new capital rules, in a base-case scenario, Wheeler estimated. The government invested 20.3 billion pounds when it bought its stake. Lloyds would need to seek shareholder approval to start buying back the stake from 2015, Wheeler said.
The money could then be used to buy out RBS shareholders and fully nationalize that bank, which could speed up paying off the government’s 45.5 billion-pound investment, according to the note. The government could then start selling its stake in stages, he said.
By 2020, RBS may have 27.2 billion pounds in capital to distribute under a base case, wrote Wheeler, who has an underperform rating on the bank and a target price of 253 pence for the end of fiscal year 2013. He rates Lloyds neutral, with a target price of 39 pence.
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, two people with knowledge of the matter said in March. The talks are still at an early stage, the people said.