City bets on insurance sale fading from RBS agenda

Published on Wednesday 23 July 2008 21:13

BANKERS and analysts yesterday claimed the odds are sharply narrowing on Royal Bank of Scotland shelving plans to sell its insurance arm. Commonwealth Bank of Australia, meanwhile, confirmed it was in exclusive talks to buy ABN Amro's Australian and New Zealand wholesale and investment banking operations from RBS as the Scottish bank continues to bolster its balance sheet.

National Australia Bank quit talks on buying the operations, which analysts value at about 400 million, on Tuesday.

The development did nothing to dispel doubts in the City that RBS will be successful in its pivotal sale – the three-month-old 5-7 billion auction of its insurance arm, spearheaded by Direct Line and Churchill.

However, The Scotsman now understands RBS will say that it is "no disaster" if an insurance sale does not go through.

Sir Fred Goodwin, RBS's chief executive, has said repeatedly that the insurance arm is a good business, and that there would be no fire sale. Insiders say sale talks continue to "go well".

In 2007 the division made a profit of 683m even after taking a 274m hit on household claims following the worst storms in Britain in 250 years.

Even so, any U-turn on a sale would be seen as increasing pressure on the RBS board.

Leigh Goodwin, a banking analyst at Fox-Pitt Kelton, said: "It looks now as if there is a less than 50 per cent change they will sell the business.

"If they didn't get the right price from Zurich Financial (who withdrew from talks earlier this month], why would they get a better price from Allstate?"

Allstate is the American insurer now seen as the frontrunner in talks to buy the division.

Others to withdraw from the auction previously include Assicurazioni Generali of Italy and Warren Buffet's Berkshire Hathaway.

FPK's Goodwin said that "most investors would rather they didn't sell the business in a forced sale. It's not as if it's a bad business, and selling it would be dilutive to earnings".

Exane BNP Paribas analysts said: "Even without a sale of Direct Line, we think RBS can get jolly close to its new 6 per cent (capital ratio] target."

They said doing smaller sales instead could add up to about 1bn in disposal gains.

It is thought these could include its Spanish insurance joint venture, which could be broken out from its broader insurance unit. It may also soon seal a deal to offload its half share in Tesco Personal Finance, its venture with the UK retailer, which is expected to fetch about 1bn – an 800m capital gain.