O’Neil resignation raises doubts over Lloyds, RBS

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ROYAL Bank of Scotland and Lloyds face a grilling this week on whether the prospect of selling off some of the taxpayers’ holdings in the banks by the end of 2014 has hit the buffers.

City speculation that a selloff may have to be mothballed ignited last week after the head of the Treasury unit given the task of preparing for it quit after only a year in the job. Investment banker Jim O’Neil is leaving UK Financial Investments, the quango charged with monitoring the state’s holdings in British banks and eventually selling them, to return to the City.

However, his unexpected move has been seen as a lack of confidence by the corporate finance specialist in the prospect of an accelerated re-privatisation of the two banks.

Analysts said the issue was bound to partly overshadow first-quarter trading figures this week from Lloyds and Royal Bank of Scotland that are expected to show rising profits at the former and a return to profitability at RBS.

Simon Willis, banking analyst at broker Daniel Stewart, said: “Management of the two banks are bound to face questions about the share sale. It is inevitable. But the earlier timetable is still feasible. It does not make a huge difference that O’Neil is stepping down.”

The state is still sitting on an 81 per cent stake in RBS and 39 per cent of Lloyds. Chancellor George Osborne told MPs in February that he would like to sell part of those holdings by the end of next year.

And at RBS’s annual results in that month, group chairman Sir Philip Hampton said a potential share sale starting in 2014 was “a reasonable aspiration, a reasonable target”.

However, Ian Gordon, banking analyst at Investec, said: “O’Neil leaving UKFI could have had an impact if you really believed the stakes being sold next year was realistic. But I think a sale is several years away given how shy the stocks are of the respective buy-in prices.”

RBS’s chief executive Stephen Hester is also expected to say the bank’s planned flotation of more than 300 branches remains on track after the collapse last week of Lloyds’ plan to sell 632 branches to the Co-operative Group.

In terms of Q1 trading performance, Gordon has pencilled in a £1.17 billion underlying profit for Lloyds, up from £507m in the same quarter last year, when it reports on Tuesday. He forecasts RBS, which reports on Friday, will make a profit of £662m, compared with a loss of £1.4bn.

However, Gordon believes RBS’s investment banking arm will have had a “miserable” quarter, with income falling from £1.7bn to £1.2bn, and profits down from £824m to £528m.

“This is partly due to the shrinkage of RBS’s markets division and the disruption due to loss of leadership following John Hourican stepping down as boss earlier this year,” Gordon said.

Lloyds is expected to have improved its net interest margin by 1 or two basis points to about 1.96 per cent.