DISPOSING of Citizens Bank has been a regular talking point in the City but Royal Bank of Scotland has been an unwilling seller.
That looks about to change, though the circumstances prompting it are somewhat different to previous calls.
Back in the mid-1990s the bank was being urged to offload it and instead build up its mortgage business. Given what happened to the housing market in subsequent years, that may not have been a good idea.
This time the pressure is on in order to bolster the group balance sheet and satisfy those who want RBS to focus on its core UK businesses. Insiders confess that, under Fred Goodwin, it got too big and too difficult to manage. Selling assets has, therefore, been necessary, not only to clean up the balance sheet but to significantly downsize the bank’s operations.
To that end, chief executive Stephen Hester is also likely to announce a further scaling back of the investment bank when he unveils another bottom-line loss this week.
As The Scotsman reported yesterday, disposing of Citizens, via a trade sale or flotation, could raise as much as £10 billion, a sum that would dwarf the £2.8bn raised by floating Direct Line last October – the biggest flotation of an indigenous company on the London Stock Exchange last year.
Citizens is a big business with almost 20,000 staff operating in 12 US states. It was cherished by the former management and seen as a platform for further expansion in America that could have seen RBS spread across to the US west coast. But that was before the crash.
My understanding is that, whichever option he takes for the division, Hester will not want to withdraw completely from the US, just as the bank retained an interest in China after selling down its operations there. These are key markets and those who see downsizing RBS as a form of punishment for past sins should be careful that it does not restrict its ability to compete internationally. Turning RBS into a provincial bank is not necessarily in anyone’s interest.
Downgrade is not all negative
SO now we are rated AA1, the new badge of economic dishonour thanks to Britain losing its triple-A credit rating for the first time since the Callaghan years. Should we worry?
It has come as little surprise, given that the UK has been on negative watch by all three credit ratings agencies for some time and few countries still retain the top ranking from all of them.
Britain’s case was weakened by Chancellor George Osborne’s admission in the Autumn Statement that it would take longer to get the public finances in order than he had expected.
The markets have certainly been on alert for a downgrade and have factored this outcome into prices, though there will be some concern that the Chancellor may be tempted to reverse some of the austerity measures.
His initial reaction appears to counter that prospect, though the pressure to introduce measures that will stimulate growth is bound to increase.
The biggest impact will be on the coalition’s pride and reputation. It came to power trumpeting the AAA rating and the question now is how much this decision will influence the forthcoming Budget.
Scottish finance secretary John Swinney said the downgrade proved the UK’s economic policy had failed. So at least the decision left someone happy.