RBS trims float price for Citizens to pacify buyers

Ross McEwan: US flotation an 'integral part' of  RBS balance sheet plans. Picture: Phil Wilkinson

Ross McEwan: US flotation an 'integral part' of RBS balance sheet plans. Picture: Phil Wilkinson

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Lukewarm demand from investors forced Royal Bank of Scotland to float its American arm, Citizens Financial, at a knock-down price last night.

However, the state-backed lender still managed to raise about $3 billion (£1.8bn) in the biggest US bank listing since the financial crisis.

RBS chief executive Ross McEwan said the initial public offering (IPO) of a 25 per cent stake in Citizens was an “integral part” of the Edinburgh-based group’s plans to bolster its balance sheet.

A full disposal is expected to take place before the end of 2016.

RBS sold 140 million Citizens shares at $21.50 each, below the expected range of $23 to $25 that had been announced earlier this month.

Shares began trading on the New York Stock Exchange last night and ended the session at $xx.

Garry White, chief investment commentator at Charles Stanley, said: “Investors were doubtful whether Citizens’ stated profitability targets could actually be met and balked at the price offered. These targets included a near-doubling of the group’s return on equity, a key measure of profitability, in just three years.

“This does appear very ambitious, given the difficult backdrop. Also, when the owner of an asset, in this case RBS, is a forced seller, investors are also likely to pressure for the shares to be sold relatively cheap.”

However, White said: “The sale of Citizens brings the day when the government can start selling its stake one step closer.

“So, this IPO should be regarded by shareholders as positive, despite the reduction in its price.”

RBS was ordered to sell the business by European regulators as a result of receiving a £45bn taxpayer bail-out in 2008, and McEwan said: “This IPO represents a key step on the path to full divestment.

“Selling Citizens will significantly improve our capital position and help us to create a strong and secure bank that can continue to fully support the needs of its customers.”

McEwan said the group has an over-allotment option that could see it sell a further 21 million shares in the lender, lifting its overall proceeds to $3.5bn.

Citizens, acquired by RBS for $440 million in 1988, was valued at about $12bn based on the IPO price – some $2bn below what would have been achieved had it floated at the top of the range.

Shore Capital analyst Gary Greenwood said the market valuation was about 5 per cent below Citizens’ book value, which stood at $12.7bn at the end of June.

He added: “Overall, the pricing is slightly disappointing versus initial expectations, but not materially so.”

Ian Gordon, banking analyst at Investec, insisted the broker was not “overtly negative” on the group, which he said appeared to have fallen victim to market timing.

“We reiterate our view that capital repair should no longer be seen as a material challenge for RBS,” Gordon said. “Our primary concerns relate to a weak outlook for earnings and returns; we continue to forecast a modest loss in both the second half of this year and full-year 2015.”

In July, RBS unveiled a doubling in first-half profits to £2.65bn, about £1bn higher than the City had hoped for

Citizens, based in Providence, Rhode Island, provides retail and commercial banking services to about five million customers in the US and ranks as the country’s 13th biggest retail lender with about $130bn in assets.

The firm, led by chief executive Bruce Van Saun – the former RBS finance director – made a pre-tax profit before one-off items of $967m last year.

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