Osborne Should Prioritise Taxpayer Value Over Rapid RBS Privatisation

Mark wrote the piece below for this morning’s City AM. It can be read online here.

Almost seven years on from the £46 billion taxpayer bailout of RBS, it may seem perverse to ask, ‘Why the rush?’ when it comes to selling our remaining 79% stake in the still-ailing bank. But this is precisely the question that must be posed if, as anticipated, Chancellor George Osborne sets out at the Mansion House tonight a timetable for the Treasury’s exit from the banking business.

The then Labour government received plaudits for its October 2008 rescue package of RBS and the Lloyds Banking Group (the product of Lloyds TSB taking on the insolvent HBOS) which saw vast swathes of the British banking sector brought under public ownership. In swiftly shoring up these ailing British institutions, broader economic calamity had been avoided and the cash machines would continue to churn out their notes.

But beyond that short-term goal, the erstwhile government never set out an accompanying long-term strategy over the public’s eventual exit from the banking business. This absence of a clear plan continued under the coalition government from 2010. Everyone seems to agree on the desirability of as rapid a withdrawal as possible from RBS and Lloyds. What has too often been less pressing is the need to extract maximum value for our collective share. Alongside these considerations has been a broader imperative to get some semblance of normality back to the finance sector, allowing two of our big four banks to operate freely as commercial entities. Yet at times, there has also been a sense that politicians have sought to use the taxpayers’ shares in the banks as a mechanism by which to deliver political messages on tricky subjects like executive pay or SME lending. Never has it been entirely apparent which of these jostling objectives is given greatest priority by the Treasury.

In signalling last month that he would like to deliver £23 billion of privatisations over the next financial year, the Chancellor has indicated that a Conservative-majority government regards a quick-fire public withdrawal from the banking sector as its most urgent priority. Instinctively I have plenty of sympathy with that view. Nobody expected back in 2008/09 that the taxpayer would still own nearly four-fifths of RBS in 2015. I also appreciate the Treasury’s enthusiasm to stimulate wider participation in the market by potentially offering a share discount to smaller investors in Lloyds, as well as assisting in the deficit reduction plan. There is probably a lot of truth too in the notion that RBS’s shares will only continue to be depressed by the state’s majority ownership, creating a vicious cycle which may mean that the taxpayer will always face a loss when selling up its stake.

Nevertheless RBS and Lloyds are very different beasts. The former is simply not strong enough for the Treasury to replicate the successful drip-feeding of Lloyds shares into the marketplace that has seen our collective stake in LBG drop to just under 19% in recent months – and bring in a £3.5 billion paper profit to the Treasury. Whereas Lloyds has done well in offloading its riskiest investments and getting back in the black, RBS remains in a dismal state in spite of the herculean efforts of Chief Executives Stephen Hester and Ross McEwan. By the end of the last financial year, it was still holding £349 billion of risk-weighted assets and some analysts concluded RBS to be the worst year to date performer in the European banking sector after the Greek banks. Remember that this is before taking into account significant forthcoming penalties from a variety of regulatory investigations that will see the balance sheet take a further short-term hit. In short, RBS is unlikely to be turning in a sustainable profit before this decade is through – in selling its stake any time soon, the taxpayer would be looking at a loss of £13.4 billion.

In respect of Lloyds, I am still to be convinced that a specific discounted retail offering, such as that which received such unexpected enthusiasm over Royal Mail, is strictly necessary as the Treasury looks to sell its remaining stake. The fact that Royal Mail was seven times oversubscribed has no doubt encouraged the cash-strapped Treasury but public ownership in the part-nationalised banks is of a different magnitude to the original £1.7bn Royal Mail deal. In short, any discount might well represent a significant loss to the taxpayer. In all honesty, the existing, careful, drip-feed approach being co-ordinated so successfully by Morgan Stanley, should continue.

The Chancellor’s zeal to see the swift return of the banking sector to private ownership is to be commended. But our overriding priority must be to exact the greatest return for the taxpayers’ stake in a global finance sector whose recovery remains fragile and uncertain. If that means that even as late as 2020, the majority of RBS remains under some form of public guarantee and ownership, it is a price we should pay.