The government recently bowed to the inevitable and agreed to allow Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US) to create an internal bad bank for its dodgy loans, rather than splitting it into two separate banks.
In reality, a full split was never likely, because RBS would have lost a lot of money, and the bank’s shareholders (excluding the government, which doesn’t have voting rights) would not have agreed to it.
However, one change that RBS can’t avoid is the sale of its US bank, Citizens Financial Group, which is expected to be floated in several stages, starting next year, rather like RBS’s former insurance business, Direct Line Group, has been in the UK.
Why must Citizens be sold?
RBS is under heavy political pressure from the UK government to sell Citizens. The government believes the sale of Citizens is necessary to enable RBS to strengthen its balance sheet and increase lending to UK customers.
RBS recently brought forwards its timetable for the sale, and is expected to sell an initial slice of Citizens through an IPO in the fourth quarter of 2014, before selling the remainder of its stake by the end of 2016.
What’s Citizens worth?
Citizens is a regional US bank, mainly servicing the north-eastern states. Founded in 1828, it currently has around 1,400 branches in 12 states, and more than 18,000 staff.
It’s profitable but not outstandingly so, and Citizens was growing strongly until the financial crisis caused RBS to turn its focus away from the US. Citizens’ growth has since slowed, and it is now less efficient than some of its peers, making a premium valuation unlikely.
I expect Citizens to be sold at or close to its book value, which was approximately £12bn, or 73p per RBS share, at the end of the third quarter.
Will this money be returned to shareholders?
Unfortunately, there is no possibility at all that any of the proceeds from the Citizens floatation will be returned to shareholders!
The purpose of the sale is to strengthen RBS’s balance sheet, free up some of its capital and to allow it to increase its lending to UK customers and small businesses, which is the government’s goal.
However, the flotation of Citizens may benefit shareholders indirectly, as it will remove one of the obstacles preventing the government selling its stake in RBS, and returning it to private ownership.
