Please ensure Javascript is enabled for purposes of website accessibility

The U.K. Will Hold a Fire Sale of Its Version of Citigroup

By Eric Volkman - Jul 30, 2015 at 10:18AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If the British government's plans are realized, it'll soon begin to sell its massive stake in Royal Bank of Scotland at a price that could represent quite a bargain.

Don't look now, but a big bank sell-off is about to begin across the pond. Last month, the U.K.'s chancellor of the exchequer, George Osborne, said his government intends to start divesting its big Royal Bank of Scotland (NWG 0.31%) stake in the near future.

Like a certain American lender we could name, the bank was a financial crisis-era basket case that required one of the largest government bailout projects in financial history. Unlike its U.S. counterpart, it might represent a real bargain when its shares hit the market.

The British Citi
The trajectory of Royal Bank of Scotland is, in significant ways, quite similar to that of Citigroup (C -0.78%). Before last decade's financial crisis, both were sprawling, multinational lenders that had greatly overextended themselves -- at one point, the U.K. bank's balance sheet swelled to 2.2 trillion pounds ($3.4 trillion), exceeding its country's GDP.

It grew that big by buying a raft of financial assets available on the market. It didn't seem to discriminate in terms of quality and/or viability. Almost needless to say, in that era, a great many financials were low on both measures.

As a result, like Citi, it required gobs of public bailout money. The U.S. bank took around $45 billion in direct assistance, while the U.K. government of the time ponied up more than 45 billion pounds ($70 billion, at current exchange rates) to keep Royal Bank of Scotland solvent.

Mission accomplished in both cases, as the two banks have since returned to relative sanity. They're generally reverting to more conservative banking business models and avoiding big bets on dicey investments.

A very public bank
The difference between the two banks is that Citi repaid its bailout monies, exiting the government's TARP relief program within a few years. Royal Bank of Scotland, by contrast, is still in the possession of the U.K. government, which holds a whopping 79% of the company.

If Osborne's recent pronouncements are to be taken at face value, the British state will begin to unload that stake within the next few months. It won't be a quick sell-off by any means; Osborne admitted it "will take some years."

Of course it will. Flooding the market with the bank's shares would drive the stock price into the ground, as doing so would insinuate that the government was desperate to get rid of a low-value asset.

Instead, it's going to be a "drip-feed" situation, as with the other U.K. bailout case, Lloyds Banking Group. This was a far smaller rescue, and the company is in much better shape now.

Even so, the state isn't letting RBS go quickly -- at the end of last year, it held nearly 25% of the bank; these days, that number is down, but not by too much, to just under 16%.

Fire sale
Since the bailout occurred almost seven years ago, the U.K. government is probably sick to death of holding Royal Bank of Scotland in its portfolio for so long.

Another impetus for selling the stake now is the state of the company. While by no means in excellent shape, the bank has been sporadically profitable since being rescued.

And yet its share price has languished -- in my opinion chiefly because of the heavy government ownership. Royal Bank of Scotland's stock has dropped by 19% since reporting its first positive quarter following the bailout.

Meanwhile, Citi's stock has risen by nearly 60% from the date it posted its inaugural post-crisis, in-the-black quarter.

Politically, the U.K. government leaves itself vulnerable to attack if it ultimately ends up losing a lot of money on the bailout. All told, the operation cost it an average of just over 500 pence ($7.75) per share; the company most recently closed at 347 pence ($5.38). With the piecemeal method of selling off the bank, it stands a better chance of raising a respectable amount.

Pound for pound, a bargain
Although Royal Bank of Scotland is still hobbled by legacy issues, plus the costs of its bad behavior -- for instance, a looming, potentially multibillion-dollar fine from American regulators for a subsidiary's involvement in mortgage-backed securities -- it's doing the right thing by slimming its operations and reverting to its conservative, traditional, lend-and-profit roots.

For investors on this side of the ocean with appetite for risk, I think an investment in the company's American Depositary Receipts today could reap rewards a few years down the line. It's fire sale time, and like many fire sales, this one looks like it might be a good deal for buyers.

Eric Volkman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

NatWest Group Stock Quote
NatWest Group
$6.47 (0.31%) $0.02
Citigroup Inc. Stock Quote
Citigroup Inc.
$53.76 (-0.78%) $0.42

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.