Bankers are preparing for the UK government to sell a stake in Royal Bank of Scotland worth about £3bn once the state-backed lender has cleared a significant mis-selling fine with US authorities.
Two bankers involved in the process said the government was likely to wait for RBS to settle a potentially large fine with the Department of Justice over mis-selling mortgage-backed securities during the financial crisis, before it recommenced selling its 71 per cent holding.
Settling the penalty would clear the largest remaining legacy issue for RBS nearly 10 years after the financial crisis, paving the way for a return to profit and dividends. But the timing of a settlement is in the hands of the DoJ. RBS is among the last banks to settle in a protracted process that could run into next year.
In an interview on the FT banking weekly podcast, Ewen Stevenson, chief financial officer of RBS, said the impending fine was “a significant overhang on us and I think it’s holding back the government’s ability to privatise us”.
The bank has drawn a line under two other crisis-era issues this year, including a £4.2bn settlement with the Federal Housing Finance Agency for mis-selling and a deal with Brussels to meet European rules over its £45.5bn bailout.
Speculation had mounted in the City that the government would restart its sell-off in the summer despite the looming fine, in order to increase liquidity in the shares. However, one banker said the window of opportunity closed after prime minister Theresa May’s government lost its outright majority in June’s election.
The government is now under pressure from deadlocked Brexit negotiations, while the political risk of selling a stake at a weak price is high. RBS has already warned that it would need to make further provisions to cover the DoJ fine.
Former chancellor George Osborne drew ire after the government offloaded its first portion of shares two years ago at a £1.1bn paper loss, despite a subsequent report from the National Audit Office that found it was of value to taxpayers.
One person involved in the process said: “Selling ahead of the DoJ is a higher risk proposition . . . it would be better to have this behind us. But if we are in a situation where it could take a very long time, then we could be forced to take a different path.”
Another person close to the process said that once RBS had dealt with the DoJ, the government would look to quickly restart the sell-off, offloading large portions of about £3bn to institutions using an overnight accelerated bookbuilding process, which has the added benefits of speed and certainty.
UKFI and the Treasury declined to comment. Philip Hammond, the chancellor, in April warned that RBS could be sold at a loss to taxpayers.
Investors are seeking a resolution to the DoJ issue. One top 20 investor said they would “need a lower price” to accept the extra risk of buying more RBS shares before the uncertainty over the fine was lifted. Another top 20 UK institutional investor added that there seemed to be “zero interest” in the government selling more RBS shares at the moment.
Some analysts said uncertainty over the size of the fine was too big a risk for the RBS share price. Shares in RBS are trading at 273p, below the 330p when the government sold the last tranche.
Gary Greenwood, an analyst at Shore Capital, said the fine “would definitely need to be settled first” and the bank “then get the green light to pay dividends” before the government was likely to sell down.
“It’s the uncertainty around the share price that restricts them from making a sale, once that is out the way, they can go for it.”
RBS, along with other large lenders, faces the Bank of England’s stress test in November on how they would fare in an economic storm. Mr Greenwood said that, because this fine would be taken into consideration by the Bank of England, RBS would be “under pressure going into the stress test”.