Lloyds set to fly but RBS in mire

This article is part of
The Rise of Financials - July 2013

The chancellor’s annual speech from Mansion House on June 19 provided an update on the Treasury’s plans with respect to its shareholdings in both Lloyds Banking Group and RBS.

This was ahead of an announcement from the Prudential Regulation Authority stating that both banks faced a capital shortfall that needs to be addressed, RBS to the tune of £13.6bn and Lloyds £8.6bn.

In the speech, Mr Osborne announced that Lloyds Banking Group is set to return to private hands. An Initial Public Offering (IPO) is expected perhaps as early as the autumn, with shares offered initially to institutional investors and then subsequently retail investors. A privatisation of RBS seems much further off.

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Lloyds Banking Group

For Lloyds, he said he was “actively considering” how to dispose of the 39 per cent stake, and an initial placement with institutional investors is a possibility, although nothing has been ruled in (or out) at this stage.

It is difficult to imagine there would not be a retail offering at some point along the line, especially if the share price recovers.

Whether the shares are offered to the public (and at what discount) remains to be seen, but it could conceivably be at a higher price than the one we see today – the Treasury will be keen to recoup as much money for its coffers as possible.

For investors who buy into the Lloyds story, therefore, a much simpler alternative may be to buy the shares on the open market without waiting for a government announcement.

The current market consensus for Lloyds is a strong hold.


Of more interest – certainly from an investment perspective – was the RBS part of the speech. It was also rather more surprising.

The chancellor promised an “urgent investigation” into whether a restructuring of the bank was necessary into the well-reported “good bank” (existing businesses) and “bad bank” (where toxic loans would be hived off).

It seems the bank is simply not ready to be floated. This flies in the face of recent speculation that a late 2014 flotation was being considered.

Of course, before such investigations are complete, the notion of a sale of the government’s 81 per cent is fanciful. This is quite apart from the fact the current share price of 320p is a country mile from the “breakeven” price of 500p.

The shares were slammed in early May as the first-quarter trading update fell strongly short of expectations. As with Lloyds, the lack of a dividend payment is negative, and government interference seems to have resulted in the departure of the chief executive at a crucial stage for the bank.

For RBS, a return to grace in the eyes of the market, let alone a sale of the majority stake, seems a little further off than before.

Richard Hunter is head of equities at Hargreaves Lansdown


Data for Morningstar shows the average daily trading volumes spanning three months of financial stocks listed in the UK.