When the Labour government bailed out Lloyds and RBS in the 2008-9 crisis, it was clear it wouldn’t be permanent. This was no nationalisation, just a temporary measure to protect two of Britain’s banking giants from collapse. On the face of it, then, it might be surprising that after five years with George ‘cut the deficit’ Osborne as chancellor, the state has yet to sell.
Could that be about to change, now that the Tories have shed their Coalition partners? The government has gradually offloaded half of its 43% stake in Lloyds, with a further £9bn sell-off announced in March’s budget set to bring it to roughly 7%. Its 80% stake in RBS received no mention then, though Osborne is now reportedly looking at offloading that too.
To understand whether this is likely to happen any time soon, consider why the state hasn’t already sold its RBS stake. The Exchequer wants the cash and it’s no longer propping the bank up, after all. The reason is of course that to do so would be to make a rather stinking loss.
The state coughed up £46bn in 2008-9 to bail out RBS. To recoup that ‘investment’ on face value, RBS’ share price would need to be around 502p. However, taking inflation into account, the government’s initial bail out would now be worth £57bn, pushing the effective break-even point to around 622p. Selling now would return £32.5bn – a real term loss of £24.5bn.
RBS’ share price will not rise to 622p. The bank’s losses since the bailout have totalled more than £46bn, as its assets have been repeatedly written down. It just isn’t worth that much anymore, so the government will make a loss when it sells.
It might seem sensible, given that RBS continues to make a loss from hefty regulatory fines, to cut that loss and run. Selling now may be missing a trick, however. The swarm of regulators stinging banks with fines will surely buzz off eventually (presuming there are no more scandals left to emerge).
Just as importantly, the huge restructuring costs RBS has endured under Ross McEwan will likely lessen over the next few years, presumably leaving a more profitable enterprise, less exposed to asset write-downs.
Ultimately, the decision will be a political rather than a financial one. The Conservatives won’t want to be seen hold on to a controlling interest in a bank for long, and will want visible progress in taking care of the deficit. Once RBS starts to look a little bit more like Lloyds, the share sale is likely to follow.