What Price Will Lloyds Banking and Royal Bank of Scotland Be Sold for?

LONDON -- A few weeks ago, I asked "When will the Government Sell Shares in Lloyds and RBS?", suggesting that David Cameron would do something before the next general election in May 2015. Since then, managers at both Lloyds  (LSE: LLOY  ) (NYSE: LYG  )  and RBS  (LSE: RBS  ) (NYSE: RBS  )  have made positive noises about being ready for privatization in that time-scale.

Speculation on the form of any privatization has increased, too, with the Policy Exchange -- said to be George Osborne's favorite think tank -- calling for a mass share distribution along the lines of Baroness Thatcher's era. With a strong political agenda, there's a good chance of a retail element.

The next question is the price the shares might be sold for. With the state's 82% holding in RBS and 39% stake in Lloyds some 24 biillion pounfd under water, there's little chance of avoiding a loss. Last week several newspapers suggested that Mr Osborne will argue that former chancellor Alasdair Darling overpaid when he bailed out the banks in 2008.

Lloyds at 61 pence to 74 pence
Lloyds' CEO Antonio Horta-Osorio's bonus scheme gives some clues. It pays out if the government sells at least a third of its stake above 61 pence, the price at which the shares are held in the national accounts. Alternatively the shares must reach 74 pence, the actual average cost, for 30 consecutive days. I guess Horta-Osorio might frustrate a privatization below 61 pence, so that puts a floor on the price.

The latest published figures that a pre-general election sale could rely on are 2014's full year results. Currently Lloyds, at 55 pence, is trading at 1.0 times tangible net asset value (TNAV). Absent a change in the economic environment, that multiple isn't likely to shift much. The bank added 3 pence to its TNAV last quarter, so if it carries on at that rate, the shares could be around 76 pence by the end of 2014 -- just above the average holding price.

The government has little incentive to sell above the average holding price. A sale between 61 pence and 74 pence looks feasible.

RBS -- not so clear
The equivalent figures for RBS are a 410 pence holding price and 500 pence average cost. That's well above RBS's current share price of 290 pence. Including the government's B shares, it's trading on 0.63 times TNAV of 459 pence.

If RBS's TNAV also grows at last quarter's rate it would be 550 pence by the end of 2014, and the share price would be 346 pence if price-to-book doesn't change. The bank's rating might improve, but would have to reach 0.75 times TNAV to equal the 410 pence holding price.

That means the government might take a bath. RBS's share sale could be an electorate-friendly give-away.

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