RBS’s road to privatisation

Royal Bank of Scotland is on the rise after George Osborne announced plans to starting selling off the government’s stake in the bank. 

Source: Bloomberg

Seven years on since the government bailout RBS is ready to begin the privatisation process, and the news has been welcomed by the market. In 2008 Westminster poured in £32 billion to save Britain’s fourth-largest bank from bankruptcy, and George Osborne revealed last night the government will start unwinding its 79% stake in the finance house in the coming months. The taxpayer may lose up to £7 billion on the re-privatisation, but Mr Osborne will tell you it is a price worth paying for the stability of the banking sector during the credit crisis.

The bank was on the cusp of posting its first full-year profit last February, but a £4 million writedown in relation to its US operation, Citizens Bank, kept the company in the red for the year. The company has been reshaping itself since the stake took a majority shareholding, and asset-stripping combined with cost-cutting has been at the forefront of senior management tasks. As much as the firm is changing, it can’t escape its past, and PPI provisions and fines for rigging the currency markets still hang over the bank. The property market in the UK and Ireland have made substantial recoveries and mortgage will still be a core service of the bank.

The government has disposed of a substantial amount of Lloyds shares in the past year, and further sales are in the pipeline, which will provide a blueprint for the RBS plan. As Joshua Mahony stated, it’s all about control, and the more autonomy RBS has in the future the more risk it can take on, and thus the greater possibility for profitability.

RBS will reveal its first-half numbers on 30 July, and the market is expecting revenue of £8.14 billion and adjusted net income of £2.29 billion. The bank will announce its full-year figures in February, and dealers are anticipating revenue of £16.35 billion, and adjusted net income of £3.1 billion. These forecasts represent a 10% decline in revenue, and a 29% fall in adjusted net income.

Equity analysts are a touch on the bearish side when it comes to RBS, and out of the 30 ratings, five are buys, 16 are holds, and nine are sells. The average target price is 363p, which is marginally higher than the current price. Investment banks are more bullish on Lloyds. Out of the 31 recommendations, 15 are buys, ten are holds, and six are sells. The average target price is 90p, which is 3.5% above the current price.

RBS’s shares have been rising since November 2011, and the 370p area is the initial target. The next level is resistance will be at 390p, and if that is cleared then 400p will be in sight. A move lower will bring the support at 350p into play, and the next support below that will be found at 340p. 

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