In April 2008 RBS shareholders acquiesced to CEO Fred Goodwin’s exhortations to a £12 billion rights issue to finance its £26 billion purchase of ABN-AMRO, in the wake of Barclays having successfully dodged that bullet or if you prefer this ‘poisoned chalice.’ The price of the rights issue was 200p.  Within a few weeks of this very measurably large issue RBS’s share price had halved.  RBS had been, for a protracted and long period of time, relentless in adding to its portfolio any number of financial assets including a stake in the Bank of China and the purchase of Citizens Bank in Chicago. By 2009 the balance sheet was gargantuan – at its pinnacle reaching £2.2 trillion – bigger than the UK government’s balance sheet at that time.


Then sub-prime lending, injudicious credit analysis and soft regulation drove the financial sector in to a vortex of despair taking the world’s economy to the brink of disaster, leaving much of it’s economy in recessions and hundreds of thousands unemployed.  RBS was amongst the most reckless and irresponsible protagonists. In October 2008, following in the wake of Northern Rock, RBS was taken into public ownership, courtesy of Gordon Brown and Alastair Darling at a cost of about £45 billion (73%). Shares in private ownership fell to 11p in January 2009.


Chairman Sir Tom McKillop and CEO Fred Goodwin and most of the board were removed from office.  Stephen Hester replaced Goodwin and eventually found he had a tortuous relationship with Chancellor George Osborne.  He manfully tried to cut the balance sheet size but found selling assets into a buyers’ market was tough. RBS’S loan book was also toxic. To add to the gloom there were big IT issues, PPI claims, FX and miss-selling of mortgage backed securities to deal with, costing billions of Pounds in write-offs and fines.  In the past decade RBS has haemorrhaged £100 billion in terms of losses and the bail-out cost. Hester, many thought, was dealt a bad set of cards, but he was replaced with Ross McEwan. McEwan has proved a solid steady pair of hands.  He has seen the balance sheen cut by a £1 trillion.  Investment banking has become history! RBS failed to sell the Williams & Glyn operation and a deal was agreed with EU that as a quid pro quo, RBS would provide a £750 million lending facility for SMES. There have also been about 15000 redundancies.


Will the tax taxpayer ever be fully recompensed for its bailout money? -  Very unlikely.  Breakeven is 503p.  the share price is currently 286p (up 3.48% on the day), on news that the banks has settled with the DOJ the sum of $4.9 billion for the mis-selling of mortgage backed securities, rather less than was forecasted ($7bn). What else needs crystallising before the bank can be offered back to the public? There are definitely still very worrying issues of RBS’S ‘Global Restructuring Group’ and many believe this will be a costly exercise setting the claims.


However, many banking analysts believe that there is some light at the end of the tunnel.  Offering $20 billion back to the public is a task of herculean proportions.  There was I think, an original thought that maybe the public might get a 5% discount to sale price. If that idea is still in play remains to be seen. Is it that attractive, with millions of shares needing to be sold?   To complete it smoothly and carefully without too many share overhangs will prove very challenging for the investment banks and their global advisors.  Chancellor Hammond will be giving it careful thought as to how much of a hit he thinks the taxpayer should take to get this bank off the government’s balance sheet. In the right circumstances greater banking acolytes than me tell me RBS could be very attractive.


David Buik

Core Spreads

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