Abu Dhabi, UAEWednesday 16 January 2019

Ivan Fallon: UK government should cut the strings and sell its stake in RBS

Even after Lloyds Banking Group was bailed out by the UK government, it is Europe's second biggest bank while RBS is still reporting losses. Perhaps it's time for a great privatisation drive.

The ravages of Fred “the Shred” Goodwin, the disgraced former chief executive of Royal Bank of Scotland, still live on, and probably always will. As RBS prepares to unveil another whacking great loss on Friday of about £6 billion (Dh27.38bn), taking the total so far since the 2008-09 financial crisis to £55bn, the UK government has abandoned any lingering hopes of getting its £45.5bn of state aid back. The total value of the bank today stands at £30.4bn, making the Treasury’s 72 per cent worth about £22bn.

Despite the sharp rise in its share price on Monday following the EU compromise agreement to let it keep Williams & Glyn, there is no prospect of it eliminating that gap.

This does not even begin to tell the full story of the value destruction wrought by Mr Goodwin’s ambition to make RBS the biggest bank in the world – which he achieved, in balance sheet terms at least, before the crash. RBS shares were trading on Tuesday morning at 257p. Their peak in 2007 was over 6,000p. Every time the City thinks it might be through the worst, some dark dealing creeps out of past to haunt it, the latest being a further $3.8bn cost of settling various investigations by US authorities.

Contrast that with Lloyds Banking Group, bailed out (although it didn’t actually need it) on the same fateful day in 2008. On Friday, it is expected to announce a profit of about £2.4bn for last year, after further write-offs and impairments. Its actual underlying profit, the level it should be running at once it is finally shot of the payment-protection insurance scandal, which has cost it £15bn so far, is at least £6bn and nearer to £8bn. Today its market value is £47.7bn, making it Europe’s biggest bank after HSBC. And the government has successfully sold down its 42.5 per cent stake – it still has a nominal 5 per cent – at a small profit. On the face of it, that’s not a bad story. Unfortunately, while the UK taxpayer has got his money back, long-term Lloyds shareholders have not been so fortunate. Lloyds, as a stand-alone bank, was forced by the government to take £7bn in 2008, which it didn’t need or even want. However, it was also heavily leant on to bail out HBOS, the old Halifax/Bank of Scotland combination now happily consigned to history. If Lloyds had not stepped in, the British banking system would probably have gone into financial meltdown, the consequences of which we would still be feeling today. But poor Lloyds shareholders have had to bear the burden of HBOS’s £45bn of writeoffs and losses since, which only a bank as well-managed and sound as Lloyds could have survived.

Some historical data to complete the picture: in April 1989, the shares of Lloyds hit an all-time peak of 525p, valuing the bank at £42bn, making it the biggest bank in the world by market value (Wells Fargo, which claims that title today, is worth $291bn, but back in 1989 it was a minnow, best known for its western stage coaches and bank robberies). The UK government invested in Lloyds at 80p a share, an 8 per cent discount on the market price. Subsequent injections of state money took its average price down to 63p. By March 2009 the shares were at 18p. Since then they have been near 90p and today they are 66p. Just to complete the picture: on June 23, Brexit voting day, the shares of Lloyds Banking Group (as it is now) closed at 72p. The next day they closed at 57p.

So depending on when they jumped on, Lloyds’ shareholders have had quite a roller-coaster ride. Unfortunately, for many years its yield, which often touched 7 per cent, twice that of other banks, made it the great widows and orphans’ stock. Many of those shareholders are still there.

As far as Lloyds is concerned, the long saga of having HM Government as its biggest shareholder is drawing to an end, with honours even.

At RBS honours will never be even. But it is also time to pull down the curtain on this one, sooner rather than later. After a decade of losses, the bank’s chief executive, Ross McEwan, this week signalled a return to profit in 2018. “In the next two years you’re going to see a great bank emerge out of this and I think the public in the UK will be very pleased with it,” he told the Financial Times.

That’s the time for the government to bite the bullet and sell the lot, a massive privatisation along the lines of Mrs Thatcher’s innovative privatisations of BT and British Gas when everyone in the country was invited to participate.

That should make Theresa May, the prime minister, very popular.

Ivan Fallon is a former business editor of The Sunday Times and the author of Black Horse Ride: The Inside Story of Lloyds and the Financial Crisis.


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Updated: February 21, 2017 04:00 AM