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In 2008, the government had Royal Bank of Scotland’s back, providing a big bailout. These days, minority investors just want the government off the back of the lender, renamed NatWest.
UK Government Investments has taken a small £1.1bn step towards separation by selling some of its holding back to NatWest, most of which it will cancel. The purchase might look cheap at 190 pence per share — 0.7 times tangible book value. In truth, HM Treasury has transferred about £1.1bn to itself via the bank it controls, crystallising a loss.
NatWest has to balance the needs of independent shareholders and taxpayers. The former want a return to full private ownership and the chance to pocket excess capital. The bank has perhaps £8bn of this. UKGI needs to get the share price back up towards its purchase price of 502 pence even as it sells out.
NatWest has two main options for distributing surplus cash. It can purchase up to 4.99 per cent of outstanding shares directly from UKGI annually. But that happens only when UKGI decides to sell, not the other way round. It also means NatWest paying into its pension scheme, which received an extra £134m, for a total of £500m this year.
Dividends and buybacks are the other avenue. Expect about £800m in payouts annually, rising steadily on a 4 per cent yield. The Prudential Regulation Authority is allowing an extra handout worth half a billion pounds this year.
But here’s the uncomfortable (back) rub. NatWest’s cheap buyback reduces tangible equity, thereby improving returns. These incremental reductions in UKGI’s holding, however, do little for the stock overhang. Its 61.7 per cent shareholding will fall by less than 2 percentage points.
NatWest has jettisoned some serious baggage, running down its toxic assets and reaching outline settlement on US mortgage-backed securities claims. But it will keep its biggest and most irksome legacy — hefty state ownership — for many years. The only alternative scenarios would be for the state to cut its losses or bank stocks to stage an implausibly strong recovery.
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