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Why it is the right time to sell shares in RBS

Is it right for the government to sell shares in RBS at this time? Yes, it is. And those complaining about it need to realise first of all that the taxpayers’ stake was not an investment, it was a rescue fund.

Alistair Darling and Gordon Brown may have hoped one day to get their £45.5 billion back, but it was not a condition of the support package that a penny of the money was recovered.

To that extent, normal procedures around shareholder practices should be set aside, except that all shareholders know that the value of their holdings can go down as well as up. This one has been under water for a long time and there could be a long wait for it to double in value in order to break even in markets currently enjoying a bull run.

It is hardly unusual for any investor to cut his losses, or suffer the consequences of poor or ill-timed judgement. Just ask Wesfarmers which recently sold Homebase for £1 after buying the DIY chain for £340m just two years ago.

The timing of the RBS bail-out, of course, was not of the government’s choosing. Having decided that rescuing the bank was preferable to seeing the financial system collapse, it had to pay the going rate. Given the scale of the crisis, and what subsequently unfolded, it should have come as no surprise that the price would fall.

So where are we now? RBS is much changed from the bank which crashed. It has rebuilt its balance sheet, disposing of billions in assets in the process. It is making a profit and there is a prospect of a return to the dividend list. These are good enough reasons alone to consider a change of ownership and to release the bank back into clutches of the free market.

Stock markets are also at new highs, so the shares are being sold at a time of growing investor appetite for equities.

As for the government, it had to make a number of judgements, not least finding a good reason to have public money tied up in an asset that, in spite of the loss, is still worth more than £20bn – money that could be better spent elsewhere.

It has long been the view of this column that selling the shares in small tranches is better than selling the entire holding in one go. It echoes the process adopted by the US government in successfully recovering funds used to rescue its own banks. By offering the shares in slugs, it helps encourage future investors through greater liquidity and by signalling that the bank is on the mend. This should help drive up the price.

This theory hasn’t quite worked – the 925m shares sold this time at 271p compares with a price of 330p achieved when George Osborne sold shares in August 2015. However, there are reasonable excuses: the PPI crisis has been worse than expected and the legal issues took a long time to be resolved. Now that these infamous ‘legacy’ issues are nearing a conclusion there is a clearer path ahead.

There is, of course, the little matter of the next general election and ministers will be keen to see the process of offloading RBS well under way by the time it goes back to the voters. It will signal to the electorate that while Labour was forced to deal with the banking crash, the Conservatives are the ones who fixed it.

 

 

 



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