Following a letter of advice from Bank of England governor Mark Carney, the Chancellor of the Exchequer has made the decision to sell a chunk of the government’s shares in RBS, seven years after Labour saved the bank from financial ruin.
However, for potential investors the important detail is the price; 330p per share – a 7.6p discount on the 3 August closing price and a 170p per share loss on the 500p paid in 2008, amounting to a £1.1bn loss for the UK taxpayer.
RBS shares were trading at 336p as at midday on 4 August, but, despite what appears to be a deal on the outside, David Madden, market analyst at IG, says investors should think before buying.
“In terms of the share price action, things are going to get worse before they get better,” he expanded.
“The share price will not go much higher in the next nine months, and should remain within the range of 330p and 380p – 400p is out of reach for at least the next year.”
While Madden conceded that the government loosening its grip on the bank is a step in the right direction, he warned that other influential factors mean it could be up to three years before RBS represents good value.
“The smaller the government’s stake, the freer the bank is to take on more risk, which allows for more profitability,” he said.
“But there are other problems: PPI, legal costs, various allegations of market fixing, etcetera. The bank is back on the right road, but the government has several more rounds selling to do before it becomes a minority shareholder and the share price will remain under pressure for a number of years.
“Also, RBS making capital on returns through share buybacks are paying dividends to shareholders is not yet on the horizon, and will not be anytime soon. When the government stake gets down to around 20-25% and RBS is getting closer to privatisation – this is when we will see more investors start to come in.”
Brian Cullen, manager of S.W. Mitchell Capital’s UK Fund, currently holds net long exposure to financials of 8.4%, and concurs that although the sector is making steps forward in general, patience is the best policy.
He said: “There is a lot of cynicism around the big banks, and a lot of people have turned away from that sector – this is where the real value is. As that cynicism unwinds there is a lot of pent-up potential, and, while we do not own a position in RBS, when things finally start to work again there will be quite a lot of opportunity.”
