NOW that Royal Bank of Scotland and Lloyds (owners of Bank of Scotland) have produced their 2011 results, what do the figures tell us about the prospects of either bank being returned to full private ownership any time soon? The UK government owns 83 per cent of RBS and 41 per cent of Lloyds. Times continue to be tough. What chance we, as taxpayers, might get some of our “too-big-to-fail” investment back anytime soon?
Between the two, pre-tax losses are still running in excess of £4 billion a year. Yesterday, Lloyds’ share price was around the level of the dividend it was paying on each share as recently as 2007. RBS’s share price is even lower and little more than half the level needed for a break-even exit there.
However, at the operating level, both banks are making money again. Cumulatively, since Stephen Hester arrived, Royal has actually made £33bn. But all that and more has been consumed in progressively clearing up the toxic legacy left, in other parts of its operations, by the old regime.
Both banks face ongoing uncertainties. These 2011 results have been marred, especially at Lloyds, by hefty provisions relating to the payment protection insurance scandal and by ongoing exposure to both Irish and Greek debt, especially at RBS. With the prevailing outlook on both the UK economy and that of the eurozone still, on the whole, rather downbeat, the kind of recovery in fortunes that would turn both banks back into floatable propositions looks far from assured.
Indeed, Lloyds’ group chief executive, Antonio Horta-Osorio, conceded as much yesterday, predicting a standstill in output in the UK this year, rising unemployment well into 2013 and flat property prices across both years. Throw in a tougher regulatory environment and it’s not easy to see opportunities for the UK government to cash in its banking chips in the near future.
Certainly, apart from the state shareholdings, other emergency interventions undertaken by the Bank of England in the depths of the 2008 crisis are already being unwound. And the fundamental underpinnings of more prudent banking practice – healthier capital ratios and the like – are already being achieved. But RBS’s Hester says his recovery plan still has two years to run and his counterpart at Lloyds is only one year into what he has publicly suggested is a three-to-five year journey.
Over that kind of time-frame who knows what unforeseen developments might change the picture yet again? Hester craves the day when the “public controversy” over RBS finally lifts. But the depth of feeling over bankers continuing to get bonuses while millions of other workers face pay freezes or the dole, seems hard-wired into the national consciousness. And that’s not the only challenge facing those banks from their current part-custodians in the public realm.
The longer it takes to put RBS and Lloyds back on their feet and fit for a return to the private sector, the more that process will become messily embroiled with Scotland making its mind up on independence in late 2014 and the Conservatives trying to win an outright mandate at Westminster in May 2015. Politics, as well as public disapproval, will almost certainly play a growing part in their eventual fate.
Not so long ago David Cameron was catching the public mood and railing against “rewards for failure” at the top of banks and other businesses with the best of them. This week he turned full circle and hit out at what he called “dangerous rhetoric” suggesting business is not a force for good in society. He promised to lead the fightback against what he called “anti-business snobbery”. But the longer this age of austerity persists and the nearer we come to that date with UK electors in 2015, the more our ever-flexible Prime Minister may ponder on what he could do with some of that £65bn tied up in state shareholdings in RBS and Lloyds. With further welfare cuts due to kick in in April, pressure is already building on George Osborne, in the run-up to next month’s budget, to find a few spare billions for tax cuts to kickstart growth and recovery.
Former Tory Cabinet minister John Redwood has already called for RBS to be broken up now, the bits sold off to provide some additional cash for the Treasury. Even if Redwood is ignored, the argument won’t go away. There are others, like former Labour minister and City grandee Lord Myners, who are arguing that if RBS is to be normalised “government must remove the shackles of quasi-nationalisation as soon as possible”.
The key, argues Myners, is not to wait for the far-distant day when the state might get its full 50p a share back. But to realise value now by changing the bank’s capital structure, enabling RBS to start paying dividends again and go for a partial sale below 50p to build confidence in the stock. It’s not inconceivable that, as it gets more and more desperate to find the wherewithal to fuel recovery, the coalition will eventually inch towards what Myners calls this “brave political decision”.
If it did, what might that mean for Scotland, gearing up for its referendum and watching what’s left of its two 300-year-old banks help fund a Cameron bid for a second Westminster term? A lot less than you might imagine, it seems. In early January, Alex Salmond told Channel 4 News an independent Scotland would not accept any share of the liabilities of the part-nationalised RBS or Lloyds because blame for their current state lay with the UK Treasury.
On Wednesday’s Newsnight Scotland, Crawford Beveridge, chairman of the First Minister’s reformed Council of Economic Advisers, was asked about his views on the future of banking in an independent Scotland. In 2008, just before the crash, Iceland’s banks had assets supposedly worth nearly ten times national GDP. Ireland’s banks had assets getting on for five times GDP. Scotland’s banks had assets in excess of 20 times Scottish GDP.
Would that scale of exposure be credible or sustainable, if things went wrong again, Beveridge was asked. It would be “very hard” for an independent Scotland to do what the UK had done in 2008 in rescuing RBS and Lloyds, he acknowledged.
Then came the real insight into Nationalist thinking on banks. “Are we saying we want a huge, internationally-dominant bank based in Scotland?” mused this senior Salmond adviser. “Or are we saying we want a bank like the Bank of Estonia or the Bank of Latvia… that don’t expose themselves to an international degree of risk?” That latter option, he then suggested, “makes a lot of sense”.
But of course banks like Kaupthing in Iceland and Allied Irish were small banks in small countries that leveraged themselves into financial disasters. Is the SNP really minded to let the sun finally set on the Scottishness of RBS and a large chunk of Lloyds, to start all over again with a small Bank of Scotland Mark Two? I think we should be told.