Are Royal Bank of Scotland Group Share Sales Just Around the Corner?

Ever since its acceptance of a 45 billion pound bailout in the depths of the financial crisis, Royal Bank of Scotland Group (NYSE: RBS  ) has been under majority government ownership. With the government stake at 81% today, many private investors are turned off by the current ownership structure.

But a BBC report earlier this month implies that share sales may begin sooner than previously thought. I'll take a look at what this would mean for RBS and its investors.

Reducing stakes
Bank bailouts are far from popular on either side of the Atlantic, but have been grudgingly implemented to prevent greater economic collapse. Currently, two major British banks remain partially owned by the government -- RBS at 81% and Lloyds Banking Group (NYSE: LYG  ) at 25%.

The government has been steadily reducing its stake in Lloyds, as the bank has returned to consistent profitability; something RBS has yet to do. Unlike the Lloyds stake, which has fallen from 39% to 25%, the RBS stake has remained essentially the same due to the lack of government share sales.

A new strategy
Reducing its RBS stake has always seemed to be a problem for the British government. On one hand, reducing its stake could be politically popular and help the image of the bank in private markets. On the other hand, RBS has not shown consistent profitability, and selling shares at current levels would mean incurring a loss for the UK Treasury.

But a BBC report says that UK Financial Investments, the government's vehicle for owning the shares, "has been approached about exploring a series of small stake sales to kick start the process."

Selling small stakes in RBS, probably to institutional investors first, would follow the same path as the Lloyds sales. Although the first RBS stake sales would almost certainly be done at a loss, once the markets realize that the government is serious in reducing its RBS stake, shares may rise in value like they did with the first Lloyds sales.

Confidence in the bank
Investors tend to dislike businesses that have inconsistent profits, large government ownership stakes, and few signs the government stake will be reduced. For now, RBS has all three -- but selling off some of the government stake could help with two of these three investment negatives.

By beginning share sales, the market would see that there is a plan to eventually return RBS to private control, and as sales continue, the government ownership stake would become less of an overhang.

Share price behavior at American International Group (NYSE: AIG  ) provides a fine example of how the market can react positively to the full liquidation of a government stake. Government ownership of AIG peaked at 92%, up from 79.9% after a conversion of preferred stock into common stock. AIG shares were trapped in the $20 and low $30 ranges as the stake was unwound. But after the last of these shares were sold to private investors, AIG moved higher, eventually hitting today's $50 range.

RBS won't necessarily repeat AIG's move, but it does serve as an example of the potential upside once a large government stake is fully eliminated. Although RBS may receive an initial boost as share sales begin, the AIG example would take significantly longer to play out in full as the government stake in RBS would need to be fully divested.

The bottom line
RBS still has its fair share of challenges ahead of it, and these share sales are far from complete. However, if UK Financial Investments chooses to act, it could kick off a process necessary to restoring market confidence in the bank.

This bank remains a long term investment, as changes in market sentiment take time -- as will any sell down in the government stake.

These stocks beat the big banks...
Here's your chance to pocket big dividends. Over time, dividends can make you significantly richer. And guess what? The big banks are laggards when it comes to paying dividends. So instead of waiting for a cash windfall that may never come, check out these stocks that are paying big dividends to their investors RIGHT NOW. Click here for the exclusive free report.

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

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.

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: 2999341, ~/Articles/ArticleHandler.aspx, 9/1/2015 12:15:09 PM

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...

Alexander MacLennan

Alexander MacLennan is a Fool contributor covering Industrials, Airlines, and Financial companies. He is always ready for a good growth or turnaround story and tries to find them before the market does.

Today's Market

updated Moments ago Sponsored by:
DOW 16,193.83 -334.20 -2.02%
S&P 500 1,930.66 -41.52 -2.11%
NASD 4,701.51 -75.00 -1.57%

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

9/1/2015 11:59 AM
AIG $58.85 Down -1.49 -2.47%
American Internati… CAPS Rating: ****
LYG $4.68 Down -0.10 -2.09%
Lloyds TSB Group CAPS Rating: ***
RBS $9.99 Down -0.28 -2.73%
Royal Bank of Scot… CAPS Rating: **