State sell-off of RBS may not be for faint hearts, analysts warn

The RBS logo outside a branch of the Royal Bank of Scotland on Threadneedle Street, London Dominic Lipinski/PA Wire
The RBS logo outside a branch of the Royal Bank of Scotland on Threadneedle Street, London Dominic Lipinski/PA Wire
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AS the Government prepares to sell off its majority stake in the Royal Bank of Scotland, analysts have warned that the shares may not appeal to timid investors.

The Chancellor George Osborne said the “decision point” about the sale had been reached after an independent review concluded that the losses to the taxpayer would be more than offset by the profits on other bank share sales.

The then Labour government injected a total of £45.5bn into RBS – taking a 79 per cent stake in the bank – to prevent its collapse in the wake of the crash of 2008. In his annual Mansion House speech to the City, Mr Osborne said that the size of the Government’s holding meant that the sell-off would take “some years” to complete.

While the complexity meant that the first offering – to take place in the coming months –would be to the financial institutions only, he said future disposals could include ordinary investors.

However, John Goodall, the manager of private client research at WH Ireland, said it was no secret that the banking sector has been struggling in recent years, with “relentless” pressure on net interest margins, which are a key measure of the bank’s profitability.

He told The Yorkshire Post: “This has resulted primarily from the low interest rate environment, and we see little change in the short term, at least given the muted outlook for inflation.

“RBS has made some progress in improving its returns with net interest margins rising from a low of 1.8 per cent in 2012 to 2.3 per cent in the first quarter of 2015.”

Mr Goodall acknowledged that RBS’s performance had also been boosted by cost-cutting measures, and impairments had declined.

He added: “As the group returns to health, it is expected to return to the dividend list with a payment of 7p forecast in 2016.

“However, without any further operational improvements which will be difficult to achieve, our calculations show that a net interest margin of around 2.8 per cent will be necessary for the group to cover this payment. Clearly, this is a challenging target.

“Additionally, considering the unknown regulatory risk, we believe that RBS is only a buy for the brave investor at this juncture.”

Jonty Warneken, the head of the Harrogate and Teesside offices at Sanlam Private Wealth, highlighted the fact that the bank has been beleaguered by costly historical conduct charges, a “demanding and highly political” shareholder base and rock-bottom interest rates.

He added: “The RBS recovery to date has lacked any kind of positive catalyst and, whilst there are signs of a recovery, at present the shares do not offer sufficient potential return for the inherent risks. There is simply not enough value to excite prospective shareholders.

“Optimists would argue that RBS’s balance sheet is well capitalised but would admit that the UK Government’s stake being sold will likely be value-destructive in the short term.

“Future interest rate rises offer opportunities to increase net interest margins, though the lending market will be more competitive and the consumer more discerning. With the peak of litigation and conduct risk passed, the sale of the government holding, with preferential dividend rights, will remove a significant barrier to shareholder payments being made in the future.”

According to Mr Warneken, cautious investors may wish to hold off until the fallout from the sale has passed.

He added: “If you have a riskier disposition, then investing now may prove to be a long-term opportunity.”

In his Mansion House speech, Chancellor George Osborne said that the sale of the Government’s stake in RBS was “the right thing to do for British businesses and British taxpayers”.

He added: “Yes, we may get a lower price than Labour paid for it. But the longer we wait, the higher the price the whole economy will pay.

“And when you take the banks in total, we’re making sure taxpayers get back billions more than they were forced to put in. From bailing out the banks to bringing them back from the brink, now is the time for RBS to rebuild itself as a commercial bank no longer reliant on the state, but serving the working people of Britain.”

Keith Bowman, an equity analyst at Hargreaves Lansdown Stockbrokers, said it was too early to say whether RBS shares would prove to be a good investment for retail investors.

Mr Bowman observed that banks globally were still seen as a “political target”.

He added: “It’s such a vast weight of shares being sold, I’m sure it will be done in phases.”