Investors haven’t enthused about proposals to split RBS (LSE: RBS) (NYSE: RBS.US) into a ‘good bank’ and ‘bad bank’. Since the parliamentary commission on banking called for the concept to be investigated, and Chancellor George Osborne appointed Rothschild and Blackrock to investigate the pros and cons, the threat of a break-up has hung over the shares.
What might have been a good idea five years ago seems to many little more than politically inspired now. Former CEO Stephen Hester certainly didn’t like the idea, and reportedly neither does the Treasury. Yet Mr Osborne recently cleared the way with EU authorities to implement a break-up if the report, which is due by the end of this month, comes out in favour.
Ebullient
Hitherto, I’ve thought the risk of a break-up to be low. But I’m starting to wonder if an ebullient Mr Osborne, riding high after successful sales of shares in Lloyds Banking and the vastly oversubscribed Royal Mail, enjoying a booming housing market and buoyant economy despite the IMF’s stark warnings against austerity — and now wooing Chinese money to the UK, too — could make a bold move.
A smaller form of break-up might accelerate the privatisation of RBS and put a rocket under the shares. It would surely not be difficult to take the remaining £40-50bn of underperforming loans off RBS’s balance sheet. Previous objections have included its effect on Government borrowing, but the bad loan portfolio has been much reduced under Mr Hester and Mr Osborne might see more upside in a quicker sale of RBS shares.
Disposal
A report in the Sunday Times has suggested the government might call for a speedier disposal of US subsidiary Citizens Bank. Mr Hester wanted to float the $8bn bank some time in 2015, but a sale to a North American bank could be implemented sooner.
New CEO Ross McEwan is expected to set out his strategy alongside the announcement of the break-up review. He’ll want to make his mark. A step-change in the speed of RBS’s restructuring, turning it into something much more like Lloyds, might suit both his and Mr Osborne’s agenda. It could be good news for investors.
Recovery
RBS is a recovery stock, and most things are going in the right direction. But it’s certainly a volatile story: RBS’s shares are up 17% on the year compared to the FTSE 100’s 11%, but they’ve been down as much as 18%, twice over, in that time.
