As RBS shares plunge on the news of a £2.5bn profit hit, should the government delay privatising the bank?
David Buik, market commentator at Panmure Gordon, says Yes.
Yesterday’s announcement that RBS has had to make further provisions of £2.5bn for the mis-selling of mortgages in the US and PPI, as well as writing back Coutts’s valuation, should have come as no surprise. The task of both former chief executive Stephen Hester and more recently Ross McEwan – to cut a ludicrously large £2 trillion balance sheet to a manageable size – has been of Herculean proportions, particularly as it has been a “sellers” market in terms of disposing of assets. Their joint achievement has been considerable. However, non-performing loans and increased capital requirements will have exacerbated the situation. Though I am fully supportive of George Osborne’s policy of reducing the taxpayers’ burden – so successful to date with Lloyds Banking Group – RBS is not yet fit for purpose. It would be folly to force a sale of this bank in the current climate, particularly as there is such a wide choice of banking stocks and IPOs. Let’s hope the climate will improve in a couple of years.
Len Shackleton, professor of economics at the University of Buckingham and economics fellow at the IEA, says No.
It is argued that RBS’s falling share price means that taxpayers will get much less back than they paid, and we should therefore delay selling. But Alistair Darling injected funds to keep RBS (and, indirectly, other parts of the financial sector) afloat. It wasn’t a normal commercial investment. The value of the business now is what the share price says. With the reported new hit, the market is right to price it down. Hanging on to the shares and absorbing the projected losses might mean the price at which we sell may rise, but this is simply time-shifting and doesn’t improve the government’s (i.e. taxpayers’) underlying asset position. Nationalising RBS may have been defensible in 2008 as a means of shoring up a panicked banking system riddled with moral hazard as a result of previous government policy. But no economists seriously argue that state ownership of banks serves a useful purpose any longer, so let’s get rid.