RBS
There was more noise about an RBS sale this week in the chancellor's Summer Budget and also from UKFI.Reuters

A share buyback reckoned at about one third of the stake the government currently holds in RBS should be achievable within 12 months, given the rate of the bank's risk-rated asset reduction, according to analysts from Investec.

George Osborne said in his Summer Budget that the government expected to raise at least £2bn (€2.77bn, $3.01bn) in 2015-16 from selling down its 78% stake in the bank, which is worth around £30bn at current market value, adding that "all options for near-term disposals will be considered".

A letter to Osborne from UKFI, which oversees the government stake in RBS, said it would be possible to raise at least £2bn this year, adding in the potential for some £25bn in returns for the government looking further ahead.

Analysts took a slightly more sober view of UKFI's kite-flying figures and possibility of short term placements on the market. But cleaning up the balance sheet and shrinking the investment bank will pave the way for the bank to buy back shares - an alternative to a dividend, in which a company re-purchases shares from investors and sells them on or holds them.

Ian Gordon, head of banks research at Investec, told IBTimes UK: "I thought they had killed off the more fanciful discussion about dumping material amounts of stock into the market near term. I think nothing is going to happen until the autumn, maybe September at the earliest.

"And then, according to UKFI, we are talking about relatively modest placements, i.e. smaller than the placements we saw in relation to Lloyds some two years ago.

George Osborne
George Osborne said in his Summer Budget that the government expected to raise at least £2bn in 2015-16 from selling down its 78% stake in RBSGetty

"When we talk about various solutions to talking about the over-hang of the government's stake, fast forward 12 months then we have a very real and material conversation about share buybacks because RBS will have actually delivered the bulk of the risk-rated asset reduction," he said.

RBS's ongoing restructuring involves CEO Ross McEwan getting shot of some £166bn of assets. We also saw Citizen Financial Group's successful IPO in the US, raising over $3bn in March, which perhaps portends well for an RBS sale.

If all goes to plan Citizens Financial Group will have been sold in total 12 months from now and a good chunk of the two-thirds reduction in the investment bank will also have been delivered.

RBS intends to provide the bare minimum in terms of investment banking, but will remain the number one corporate bank in the UK. Its investment capabilities will probably be limited to FX, interest rate hedging, some DCM capability but not much else.

There has been a massive retrenchment in terms of international offices; no on-going equities capability, a massively reduced market-making and trading capacity.

Gordon said that "without any heroic earnings assumptions" a 2016 year-end Common Equity Tier 1 (CET1) capital ratio of 17.5% was achievable; that equates to a £10bn capital surplus versus 13% target.

"That can be used to buy back, depending on what price you assume, something in the ball park of one third of government stake – say a quarter to a third, depending on the price. We may see a token traditional sale placement later this year – token being the word."

Gordon said he was assuming any buyback would be a straightforward buyback of government shares or government-owned B shares.

Referring to UKFI predictions, he added, "I suspect that was a view of what could be achieved in the market. Over half of that number could and should be achieved through buybacks, hence the indigestion should be much more manageable."

"In terms of what went into the non-core book, we are now down to ball park $15bn of financed assets on the balance sheet, so we are down to very small numbers where rapid progress continues to be made.

"So that piece is becoming almost insignificant. It is a more material job in terms of managing down assets within the investment bank. From that side of it the picture is good. The weakness in the RBS story was and remains, earnings and returns.

Gordon said that after making prudent allowances for restructuring and conduct spend he expects to see a further substantial reported loss in 2015.

"I've got £2bn in my model, before we return to modest levels of earnings and returns in 2016. So the normalisation of the group in terms of earnings and returns is still a 2018 story but with the scope to make quite material progress in terms of the government ownership in 12-18 months horizon."

Bygones are bygones

Elsewhere, analysts agreed with Osborne that sooner rather than later is the way to go with the sale of the bank's shares.

Philip Booth, Editorial and Programme Director at the Institute of Economic Affairs, told IBTimes: "RBS should sold as soon as it can be. One of the principles of economics is that bygones are bygones.

"The losses that have been made are losses that have been made, and the share price now reflects the market value of the institution today, and there is as much chance that the share price will down as it will go up."

Booth said he looked forward to a time when RBS had returned to what it once was "before it got into this business of turning itself into a megabank in the mid-1990s".

Booth said: "How successful this will be – if it will be as profitable as RBS used to be, or as poorly performing as Nat West used to be is quite difficult to tell, particularly given uncertainly in the market and the likes of challenger banks.

"I don't know when it will see a regular and reasonable return on its equity, but I see it being a much narrower bank but in a marketplace that will be more difficult than the 1990s.

"After it's floated off, it wouldn't surprise me if there was some kind of takeover bid for it, though of course that would almost certainly be referred to the Competition Commission."

Sam Bowman, deputy head of the Adam Smith Institute told IBTimes: "The sell-off a good thing. It's a mistake to think that we're losing money if we sell off RBS now.

"Its share price now reflects the judgement of the market of both its present worth – in terms of its balance sheet, company assets, etc – and its future worth, in terms of how much markets expect it to make in the future.

"Markets do often get it wrong, but that wrongness can both overstate and understate the prospects of a firm. I'd look at it this way: if the government didn't own any shares in RBS, would we think it was prudent for it to buy some, just in case they became more valuable in the future? Probably not."

Darren Hepworth, Customer Services & Global Trading Director at TD Direct Investing, added: "This won't be the first time the government has sold an RBS asset, but it's almost certain to be the biggest.

"To date, we've witnessed the sale of 918 pubs owned by the bank, which were handed to Heineken in 2011, Coutts' overseas operations, RBS Aviation Capital, Angel Trains and Direct line Group - which are all now under new ownership.

He suggested the money returned from selling RBS would be enough to cover the extra £8bn a year needed by the NHS between now and 2020.