Comment: Taking a hit on RBS may be best bet

Martin Flanagan. Picture: Adrian Lourie
Martin Flanagan. Picture: Adrian Lourie
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ANOTHER day, another black eye for Royal Bank of Scotland. The bank has hired City lawyers to examine allegations from government adviser Lawrence Tomlinson that it forced viable small businesses into RBS’s version of George Orwell’s Room 101 – the Global Restructuring Group – to generate fees and stimulate the purchase of devalued assets for profit.

It comes alongside City doyen Sir Andrew Large’s full report confirming that RBS was serving its small business clients poorly anyway.

Large suggests the bank’s lengthy financial restructuring under former boss Stephen Hester caused the unintended consequence of an increasingly gun-shy risk lending appetite. To add allegedly unethical behaviour to shoddiness would be a deterioration.

New boss Ross McEwan doesn’t need this as he tries to lower the bank’s sights and raise its game through a more streamlined operation to pave the way for eventual privatisation.

However, while RBS’s share largely trod water in reaction to Tomlinson’s shock claims, the case for investing in the bank’s shares looks thin.

The 81 per cent taxpayer-controlled group is set to make its sixth consecutive year of losses in 2013, and there is little stock liquidity, anyway. Dividend resumption looks distant (unlike at rival partly taxpayer–owned Lloyds).

The creation of an internal good bank/bad bank model at RBS means the toxic assets will be run down more quickly, but with bigger losses. The bank’s credit rating has been downgraded.

RBS’s corporate banking arm is not pulling up any trees, and the much-pruned investment banking arm (under unsubtle political pressure) can no longer be relied on to provide “lumpy” profits that periodically allows banks to perform corporate legerdemain and mask a lacklustre performance on the high street.

There is no compelling case for investment in RBS shares over the next couple of years or so.

Even counter–intuitive stock-pickers will probably need appreciably longer to show how clever and ice-veined they have been.

It is also debatable whether the government should seek to get back the taxpayers’ money pumped in to the bank in the 2008 meltdown. After all, it was a bailout – not the gimlet-eyed investment decision of an institutional investor. To take a loss on the £45 billion rescue would be painful political medicine, but possibly the best way for Chancellor George Osborne get the bank’s reprivatisation show on the road.

Practical politics in the whisky ownership mix

DRINKS major Diageo has tried to square regulators on its push into India’s growing spirits market by offering to sell the majority of the Whyte & Mackay whisky business.

It is practical politics. Diageo acquired W&M through its summer agreement to buy a controlling stake in United Spirits of India.

The trouble is that Diageo already owns Bell’s, a key competitor of W&M, and also makes own-label whisky for supermarkets.

The competition concerns are clear, and so the divestment offer by the company to the Office of Fair Trading was always fairly predictable.

W&M would have been a nice parochial Scottish cherry on the United Spirits cake for Diageo, but the potential of the vast Indian spirits cake potential is far more important in the wider strategic shape of things.

Diageo’s new boss Ivan Menezes has shown regulatory realpolitik.