Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



When Will the Government Sell Shares in Lloyds and Royal Bank of Scotland?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

LONDON -- There's been a distinct change of mood music about prospects for sale of the government's holdings in Lloyds  (LSE: LLOY  )   (NYSE: LYG  )  and RBS  (LSE: RBS  )   (NYSE: RBS  ) . Twelve months ago, the chances of any sale were downplayed. Now both are being openly speculated about.

A sale of some of the government's shares should be a big boost for the shares. When might we see some action, and what form might it take?

Tell Sid
It seem pretty clear that David Cameron wants to do something concrete before the 2015 General Election. It would show that the financial crisis is finally being solved, and free the government from the headaches of bank ownership.

All kinds of scenarios have been bandied about. A plan to distribute shares in both banks to all holders of national insurance numbers has apparently been discussed in the Treasury. The complexities of adding 40m-plus investors to the share register would dwarf the logistics of the famous British Gas "Tell Sid" mass privatizations of the 1980s, and to my mind make it a non-runner.

But with politics driving the privatization, there's a good chance there'll be some form of public subscription. It would help the government to fudge how much tax-payers lost on the whole bail-out debacle. And it might even serve as a form of "helicopter money," one of the more extreme options that have been floated for getting the economy moving.

For the banks and their existing shareholders, institutional appetite is more significant. Institutions would probably buy new shares, strengthening the banks' capital. Under its present governor, at least, the Bank of England is still keen to see higher capital levels.

Both Lloyds and RBS have made good progress on restructuring. Last year Lloyds shed $40bn of distressed assets against a plan of $25bn, while RBS is predicting that this will be the last year of substantial restructuring. With PPI and LIBOR settlements largely behind them and hints of resumed dividend payments, the banks are starting to look more attractive to institutions.

RBS: the political football
RBS is the bigger political football, with the government owning a controlling 82% interest.

Management has been swift to respond to the owner's new rhetoric. Chairman Sir Philip Hampton has said he hopes a sell-off could start as early as 2014, and CEO Stephen Hester has made similar bullish remarks.

Perhaps they perceive that if there's a political imperative to do something next year, it's better to be making the running themselves. The government would find it much harder to interfere in RBS's business once further shares had been sold.

Lloyds: moving the goalposts
If the government and management are playing political football at RBS, they've moved the goalposts at 40% state-owned Lloyds.

CEO Antonio Horta-Osorio's bonus will pay out if the government sells a third of its shares at more than 61 pence. That's well below the 74 pence the government paid. But arcane accounting means that 61 pence, the level Lloyds was trading at when it was bailed-out, is the price at which the holding is carried in the Treasury's books.

With Lloyds' shares having touched 55 pence this year, 61 pence isn't so challenging a goal. While all the attention is on RBS, Mr Horta-Osorio could be lining up a couple of institutions, and might just put one in the back of the net first.

The acceleration in privatization plans is yet another positive driver for the banks' share price. As they finally put past excesses and errors behind them, there's a reasonable growth story behind both state-owned lenders.

But investment in these banks comes with a health warning over and above most shares. They would be first and worst to suffer the shockwaves from across the Channel if the eurozone crisis blew up.

For a growth story with a lower risk profile, I suggest you look at this company. Its industry has gone through far bigger changes than the banks, yet the company hasn't made a capital call on its shareholders for more than 70 years. It has increased or held its dividend every year since at least 1988.

Its earnings per share have gone up by 44% since 2009, and there could be considerable value that isn't reflected in the share price. That's why it's been chosen as "The Motley Fool's Top Growth Stock for 2013."

You can learn more by downloading a free report from the Motley Fool -- just click here.

Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2308431, ~/Articles/ArticleHandler.aspx, 9/27/2016 4:51:51 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 7 hours ago Sponsored by:
DOW 18,094.83 -166.62 -0.91%
S&P 500 2,146.10 -18.59 -0.86%
NASD 5,257.49 -48.26 -0.91%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/27/2016 4:36 AM
LLOY $54.04 Down -0.21 -0.39%
Lloyds Banking Gro… CAPS Rating: No stars
LYG $2.88 Down -0.07 -2.37%
Lloyds TSB Group CAPS Rating: ***
RBS $175.50 Down -2.00 -1.13%
Royal Bank of Scot… CAPS Rating: No stars
RBS $4.61 Down -0.14 -2.95%
Royal Bank of Scot… CAPS Rating: ***