Pressure is mounting on the Treasury to name the time and price of the first sale of shares in Lloyds and Royal Bank of Scotland, both of whom showed some black ink in their first-quarter figures last week and were equally bullish about a return to the private sector.
Sir Philip Hampton, chairman of RBS, said a sell-off could begin in the middle of next year. The mood for a sale is clearly gathering momentum, but doubters say no such offer should take place until the taxpayer at least breaks even on the £65 billion injected in to the pair at the height of the banking crisis in 2008-9.
Lloyds is closer to break even, its shares closing on Friday at 55p, just 7p short of the lowest of the two break-even prices, one being the average price paid, the other the book price in the government’s accounts.
RBS is a harder sell. Despite the headline return to profit, the figures were disappointing and the shares were the worst performers in the FTSE 100 on Friday, closing 5.7 per cent lower at 289.8p, well short of the 500p break even, or 410p on the adjusted level (or 407p as it now seems to be).
At this price, the taxpayer is looking at a £19bn loss on the £45bn injected into RBS alone. The most obvious conclusion to draw is that the shares will not return to 407/410p, let alone 500p, any time soon, probably not for years. So why wait? Why not just get on with it and sell now? After all, the £65bn of public money was a bail-out, or rescue fund, to prevent these enormous institutions from collapsing and taking millions of customers’ savings with them. It was not intended as an investment, and certainly not one that would yield a profit. No-one said the taxpayer should get anything back.
There is, however, merit in selling the shares in tranches in the hope that this process alone will stimulate demand and thereby drive the price upwards so that the taxpayer will at least see the loss diminish. This was achieved successfully in the US.
The first shares will be offered cheaply and while there is talk of a “Tell Sid” style privatisation reminiscent of the British Gas sale, a more likely first step is to sell a slug to institutions, to get the ball rolling and to assess how much of an appetite exists. It is one thing to offer shares for sale, but investors have to be encouraged to buy and a placing should help fix the price.
It is not a simple process and behind the healthier numbers are some big problems still to be cleared up. Both banks have seen the sale of branch assets collapse, denying, or at least delaying, an injection of funds and creating an uncertainty that would have to be written into any prospectus.
The big banks have been told to raise a further £25bn to prop up their reserves, with some estimating that RBS will require £6bn. A dividend access share held by the government and preventing RBS paying dividends must be bought out at a cost of £2bn. There is the flotation of Citizens, the US division, and the outstanding claims by various shareholder action groups.
We must also await the final report from the parliamentary commission on banking standards which may recommend the splitting of RBS into a good bank/ bad bank. The government would warehouse the toxic elements, freeing up the good bank to grow again.
But this is already looking like an idea past its time. As chief executive Stephen Hester was at pains to emphasise on Friday, the balance sheet is now cleaned up and the £40bn of unwanted assets that will remain are not a great concern for a bank of its size.
A greater concern for Hester is that the investment bank should not be shrunk too much. While he has accepted the need to downsize it, the prospect of further shrinkage could damage its competitiveness. It was principally the fall in earnings from the investment bank that caused the shares to fall.
All of these issues will overhang a sale and create some uncertainty and nervousness for investors. But one good reason for not delaying a privatisation any longer is simply the positive signal it sends out globally that the banks are recovering. As banks are central to any economy, it would also indicate that the economy is moving in the right direction and help instill some much-needed confidence.
How could Chancellor George Osborne resist the temptation of offering cheap shares to voters ahead of the 2015 general election? Only if he thought they would lose value before polling day.