George Osborne should prioritise taxpayer value over a rapid RBS privatisation
Almost seven years on from the £46bn taxpayer bailout of RBS, it may seem perverse to ask “why the rush?” when it comes to selling our 79 per cent stake in the still-ailing bank. But this is precisely the question that must be posed if, as anticipated, George Osborne sets out at the Mansion House tonight a timetable for the Treasury’s exit from the banking business.
The last Labour government received plaudits for its October 2008 rescue of RBS and the Lloyds Banking Group (the product of Lloyds TSB taking on the insolvent HBOS), which saw vast swathes of the British banking sector brought under public ownership. In swiftly shoring up these institutions, broader economic calamity was avoided and the cash machines continued to churn out their notes.
But beyond that short-term goal, the erstwhile government never set out an accompanying long-term strategy for its eventual exit from the banking business. This absence of a clear plan continued under the coalition government. Everyone seems to agree on the desirability of as rapid a withdrawal as possible from RBS and Lloyds. What has too often been less pressing is the need to extract maximum value for our collective share.
Alongside these considerations has been a broader imperative to get some semblance of normality back to the finance sector, allowing two of our big four banks to operate freely as commercial entities. Yet at times, there has also been a sense that politicians have sought to use the taxpayers’ shares in the banks as a mechanism by which to deliver political messages on tricky subjects like executive pay and SME lending. Never has it been entirely apparent which of these jostling objectives is given greatest priority by the Treasury.
In signalling last month that he would like to deliver £23bn of privatisations over the next financial year, the chancellor indicated that a Conservativemajority government regards a quick-fire public withdrawal from the banking sector as its most urgent priority.
Instinctively, I have plenty of sympathy with that view. Nobody expected back in 2008-09 that the taxpayer would still own nearly four-fifths of RBS in 2015. I also appreciate the Treasury’s enthusiasm to stimulate wider participation in the market by potentially offering a share discount to smaller investors in Lloyds, as well as assisting in the deficit reduction plan. There is probably a lot of truth too in the notion that RBS’s shares will only continue to be depressed by the state’s majority ownership, creating a vicious cycle which may mean that the taxpayer will always face a loss when selling up its stake.
Nevertheless, RBS and Lloyds are very different beasts. The former is simply not strong enough for the Treasury to replicate the successful drip-feeding of Lloyds shares into the marketplace that has seen our collective stake drop to just under 19 per cent in recent months – and bring in a £3.5bn paper profit to the Treasury. Whereas Lloyds has done well in offloading its riskiest investments and getting back in the black, RBS remains in a dismal state in spite of the herculean efforts of chief executives Stephen Hester and Ross McEwan.
By the end of the last financial year, it was still holding £349bn of risk-weighted assets and some analysts concluded RBS to be the worst year to date performer in the European banking sector after the Greek banks. Remember that this is before taking into account significant forthcoming penalties from a variety of regulatory investigations that will see the balance sheet take a further hit. In short, RBS is unlikely to be turning a sustainable profit before this decade is through – in selling its stake any time soon, the taxpayer would be looking at a loss of £13.4bn.
In respect of Lloyds, I am still to be convinced that a specific discounted retail offering, such as that which received such unexpected enthusiasm over Royal Mail, is strictly necessary. The fact that Royal Mail was seven times oversubscribed has no doubt encouraged the cash-strapped Treasury, but public ownership in the part-nationalised banks is of a different magnitude to the original £1.7bn Royal Mail deal. In short, any discount might well represent a significant loss to the taxpayer. In all honesty, the existing, careful, drip-feed approach being coordinated so successfully by Morgan Stanley should continue.
The chancellor’s zeal to see the swift return of the banking sector to private ownership is to be commended. But our overriding priority must be to exact the greatest return for the taxpayers’ stake in companies whose recovery remains fragile and uncertain. If that means that, even as late as 2020, the majority of RBS remains under some form of public guarantee and ownership, it is a price we should pay.