Shares in RBS climb 6% on reports the oil-rich state will buy some of our state-owned shares.
This morning, shares in Royal Bank of Scotland (LSE: RBS) leapt by more than 6%. As I write, they trade at 29.4p, valuing the bank at around £17.4 billion.
The big banking bailout
This sudden rise in the RBS share price followed a BBC news report yesterday evening that the government has held talks to sell part of the public's stake to oil-rich Gulf state Abu Dhabi and other heavyweight investors.
During the banking crisis of 2008-09, taxpayers backed massive bailouts of RBS, injecting £45.2 billion in cash into the bank in return for nearly 90.7 billion shares. In other words, we bought 83% of RBS at an average price of 49.9p per share.
Alas, with RBS shares changing hands at 29.4p, we British taxpayers are sitting on a loss of almost £18.6 billion, thanks to a 41% fall in the value of our investment.
Abu Dhabi to the rescue
Today, we Brits own roughly 82% of RBS, but this stake is something of a political football. Although our shareholding is managed at arm's length by UK Financial Investments (UKFI), ministers have been unable to resist interfering in the affairs of the bank. Recently, this political meddling forced RBS chief executive Stephen Hester to turn down a near-£1 million bonus.
Clearly, the government's RBS stake is something of a hot potato -- something to be handed back to the private sector as soon as this is politically viable. Hence, the BBC yesterday reported that the UK could sell part of its stake to overseas investors, notably Abu Dhabi, the richest of the United Arab Emirates (UAE), as well as Kuwaiti, Qatari and Saudi Arabian funds.
According to the BBC, the UK government could sell between a tenth (10%) and a third (33%) of its RBS stake to Abu Dhabi's sovereign wealth fund and/or its royal family. Also, it claims that these negotiations have been going on for months and could continue into next year.
Critics immediately pounced on this news as proof that the UK government is willing to take a loss of billions of pounds on its RBS stake by holding a 'fire sale' of RBS shares. Then again, these discussions could flush out other state and private-sector investors, thus pushing up the bank's share price yet further.
Don't bank on it
Note that this wouldn't be the first time that the UAE has come to the rescue of a British bank. During the global financial crash, the UAE invested £1.2 billion in a share placing by Barclays (LSE: BARC) and went on to make handsome returns. At £550 billion, Abu Dhabi's sovereign wealth fund is the largest in the world, so buying all of RBS today would consume a mere 3% to 4% of its capital.
According to my calculations, selling a third of our stake in RBS today (over 27% of the bank) would generate sale proceeds of around £4.7 billion. However, it would also crystallise a loss in the region of £3.3 billion, thus producing a mountain of bad publicity for politicians.
Nevertheless, the coalition government has signalled that it does not wish to be a long-term holder of RBS. Therefore, we should expect more sale rumours to emerge during 2012 and 2013 if financial markets -- and the RBS share price -- continue their recovery.
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