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Government makes £3.4bn loss from selling RBS shares
The government lost around £3.4bn from selling a £2.5bn of its stake in Royal Bank of Scotland to institutional investors this week, according to one analysis.
UK Government Investments, which manages the Treasury's shareholding, confirmed on Tuesday morning that after agreeing to place 925m shares at a discounted price of 271p per share, proceeds of £2.51bn had been made before costs.
As a result, the UKGI-managed stake will be reduced, when the placing is completed on Thursday, from 8.4bn to 7.5bn shares, or from 70.1% of the total share capital to roughly 62.4%.
The taxpayer's purchase price from the 2008 bail-out was made at a market price of 502p, which cost the state £45.5bn and means the stake sold this week would have cost £4.64bn and equate to a £2.1bn loss on the sale.
But UKGI argues that a more generous calculation can be made of the cost of acquiring RBS that puts the government's cost per share at 440p, having deducted payments received since the bailout, a significant portion of which relate to payments for additional government support. This would mean the loss of this week's sale would be nearer £1.6bn.
However, the National Audit Office calculated a government price for RBS shares that also factored in the cost of financing the share purchase, based on the average interest rate of 3.7% paid by the government to borrow money in 2008/09 and 2009/10, meant the average cost of RBS shares to the government was 643p as at 1 Jan 2017, and would therefore have risen even higher over the last 17 months.
Based on this price, the taxpayer loss on last night's share sale rises to £3.4bn.
Analyst Laith Khalaf at Hargreaves Lansdown, which extracted the NAO data last August, said while it was now clear that the losses sustained by the taxpayer on the RBS bailout are going to be substantial, "this really reflects the price paid for financial stability in the depths of the global banking crisis", with the bailout cushioning the blow of the financial crisis to "spread the pain across many years, a decision which is now beginning to become more measurable".
"We will never know what the outcome would have been if RBS had been allowed to fail, though it's important to recognise the scale of RBS at the time," he added, pointing to RBS's peak £2.4trn balance sheet that by far eclipsed the $639bn balance sheet of Lehman Brothers just before it filed for bankruptcy if not the entire annual output of the whole UK economy.
"It's just possible therefore that the collapse of RBS could have taken all the other dominos with it. Clearly the losses that are now being sustained on the government shareholding are deeply unwelcome, but the alternative to a bailout might have been far worse."
An alternate view was provided by trade union Unite, which stated that the bank's staff feel the government should be focusing its attentions on keeping RBS bank branches open and improving corporate governance.
"The government is attempting to wash its hands with Royal Bank of Scotland at the expense of the taxpayer," said Rob MacGregor, Unite national officer. "This bargain basement sale of over seven per cent of the bank's shares is a betrayal of public finances and represents a total loss of over £3 billion for taxpayers since the original bail-out in 2008."
He argued that the bank's "catalogue of failures" was more to blame, a view that was espoused in a report into RBS's collapse, where management were blamed for, among other things, the significant weaknesses in the bank's capital position, over-reliance on risky short-term wholesale funding, and the acquisition of ABN Amro that was said to have been completed with "inadequate due diligence".
Unite said the bank's selling of mortgage-backed financial products in the run-up to the crisis, which resulted in the recent $4.9bn penalty paid to US authorities, demonstrated "the systematic failures by the management to effectively run this organisation... Staff across the business are continuing to pay for the mistakes at the top whilst the government merely looks the other way."
As for investors and the taxpayer's ongoing holding in the bank, Khalaf said holding onto RBS shares "doesn't necessarily guarantee a better return".
The market's immediate market reaction was a 4% fall share price to bring it into line with the price offered by the government as part of its share sale, which will is likely to repeat as the government continues to sell down its stake in the next few years.
"In the long term the government selling down its stake in the bank is a positive development for RBS shareholders, as it represents a gradual return to business as usual," Khalaf said. "However when the majority shareholder in a business is disposing of such a large stake, that's inevitably going to lead to some downward pressure on the share price."
Neil Wilson, analyst at Markets.com, said the US settlement should pave the way for a quick return to annual profits after ten years of losses, with the bank having said it will look to resume dividend payments and having enough free cash to do so.
"The bank appears in far better shape than when the government last sold off a chunk of stock. Attributable profits in the last quarter tripled to £792m, versus £259m in the same period in 2017, whilst the pre-tax operating profit was up 70% at £1.2bn," he said.
"We note now that with the government acting as a 'forced' seller for a prolonged time it might be hard for the shares to do much in the short term, and could retreat back towards the govt price at 271p. Longer term the bank looks in decent shape."