RBS is miles away from being normal – A Mindful Money view

1st November 2013

There is simply no easy way to return RBS to the private sector giving how breathtakingly badly the bank was run in the lead up to the financial crisis.

The Government bought the shares at the height of the financial crisis at just over 500p a share. The listed part or about 19% are currently at well below that, at 367p a share.

It’s a very long way back to 500p and that is only minimising a paper loss and not considering the broader economic damage or what the Government might be doing better with the money.

At least with some shares floating we get an idea of a valuation unlike the Post Office of course. Then again a simple extrapolation tells us very little. It certainly isn’t roughly five times more. The bank lost money again. It is likely to be required to hold more capital and will have to sell off its American banking business Citizens.

It has a plan to shift its toxic assets – perhaps some 70% in the next few years- but that will be at a cut price, cut price – i.e. even more than usual for distressed toxic assets. Neither does the Government doesn’t want to add RBS to the list of bad bank assets it already holds in UK Asset Resolution ltd from Bradford & Bingley and Northern Rock. It would be the fastest way to set RBS free, but it might leave the taxpayer in chains.

At Mindful Money, we would suggest that whatever happens, the Government has to ensure that it gets a fair price eventually. It simply cannot afford to make a hash of this on price as many suspect happened with Royal Mail.

RBS should be an important source of funding to SMEs and private borrowers though another report today shows it has been underperforming in this area. It needs, as far as possible, to repay the Government help in full. But if it is returned to the private sector it has to look like it has put its toxic behaviour behind it, including getting through a host of potential regulatory actions, so that it has appeal for shareholders. It goes without saying that RBS needs to become a steady as she goes banking stock.

But it is clear today that these are least medium term challenges. RBS isn’t any threat to the economic safety of the UK. That is about the best we can say today. But it is miles away from normal.

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