Cap RBS share profits

Published on Tuesday 18 November 2008 20:25

The RBS share price closed on Monday at 44.7p. The share issue underwritten by the government is at 65.5p. The 176-page prospectus is impenetrably daunting. I calculate that there will be 39.47 billion shares after the sale of new shares. The proforma balance sheet in the prospectus shows £84.77 billions of share equity after minority interests. So there is balance sheet equity of £2.46 per share.

Let's assume the profits in 2009 decline to 6 billion – 25-30 per cent less than most expected RBS to achieve after it had fully incorporated ABN Ambro, with its attractive worldwide spread of activities. That is 15p per share, or 27p if it gets fully back on track in 2010.

In Australia now banks are valued at around 8.5 times profits. If RBS attained a similar valuation that would have RBS at 127p per share. Granted, a third rights issue would make the above simplified calculations look stupid, but on the other hand, the UK government looks as if it may be able to exit with a profit of up to 30 billion in two to three years. I note one US investment house is now drawing similar conclusions on RBS.

If the UK government really wants an early return to stability and confidence in the capital markets, it would indicate a fair cap on the profits it intends to make on RBS et al – or is common sense too much to expect?

EWAN D H MacRAE

Eskbank Road

Eskbank, Midlothian