What Lehman Brothers was to America’s experience of the global financial crisis, RBS was to that of the British – a symbol of the earthquake that had ended a long-running economic boom in the west. Already swollen by an earlier takeover of NatWest bank, RBS hubristically led a record-breaking £49 billion swoop on Dutch group ABN Amro in October 2007, two months after the credit crunch that was to trigger the financial crisis and subsequent Great Recession.
A £12 billion cash call on shareholders the following year failed to stabilise RBS, and in November 2008 the Government injected £45.5 billion into the bank in return for a 58 per cent stake.
Even this was not enough, and by December 2009, the public stake had reached 84.4 per cent ownership of RBS. In December 2011, an official report by the Financial Services Authority (FSA), then the British financial regulator, blamed multiple poor decisions for the collapse of RBS, whose then chairman agreed. Sir Philip Hampton said: “Taxpayers should never have had to rescue RBS. The FSA are right to have given the British public its assessment of events and factors that led to RBS requiring Government assistance.
A dismal performance
Today, the Government’s stake has been reduced by the return of some stock to private hands to 62 per cent, and it had been hoped that, finally, the Treasury would be able to offload the remaining shares during the financial year 2023-2024, but in his 11 March Budget, Chancellor Rishi Sunak announced that this had been postponed until at least 2024-2025.
According to UK newspaper the Daily Mail, the stake is currently worth about £10.6 billion, or nearly three-quarters less than the Government paid for it. So, Mr Sunak and his colleagues will be among those investors asking: will the RBS share price ever recover?
The performance has been dire. From a peak of 6,036.81p on 9 March 2007, shares were trading at 123p at noon on 19 March. To put that in context, they represent not only a small fraction of the peak price in March 2007, but of the 1,105.52 at which they were changing hands on 24 February 1995.
Not only in nominal terms is the share price greatly lower than 25 years ago, but when inflation is taken into account it is lower still.
This dismal performance cannot be entirely traced back to RBS’s shortcomings. Other banks have felt the squeeze as, post-crisis, reserve institutions such as the Bank of England have kept interest rates low. This reduces lenders’ room for manoeuvre in terms of making good profits on the spread between their own funding costs and the rates they charge individual and business customers.
At the same time, public policy has deliberately encouraged the rise of “challenger” banks, which can only take business away from established players such as RBS. Now, the economic impact of the coronavirus can only worsen the outlook for British banks, including RBS.
Print its own banknotes
Once, the problems of RBS would have bewildered observers. The group contains some of the great names in British banking: the Westminster, National Provincial, Ulster Bank, private banks Drummonds, Coutts, Adam & Company and Child & Co, the armed forces bank Holt’s, asset finance firm Lombard and, of course, Royal Bank of Scotland, from which it takes its name, a venerable institution with the privilege of being able to print its own banknotes.
Also, the former bank Williams & Glyn remains an RBS trademark, although its branches were rebranded as RBS in 1985. Under European Union rules, any institution that has received state aid must, in effect, “give it back” once its problems have passed in terms of surrendering any competitive advantage gained by public support.
Trade Royal Bank of Scotland Group PLC - RBSl CFD
It had been suggested that RBS could achieve this by hiving off a proportion of its customers into a revived Williams & Glyn, but this plan was dropped in favour of RBS giving challenger banks £833 million to lend to small and medium-sized enterprises.
So, will the RBS share price rise? That’s entirely possible once the current crisis has passed and the wheels of commerce start turning. Furthermore, it is likely that there will be some shake-out of challenger banks, given not all of them can succeed.
Change of name
But an RBS stock analysis must take into account two important points. One is that there is nothing inevitable about an RBS share price recovery, and anyone betting on a revival is doing just that – betting. With a majority public stake overhanging the market, and a Treasury that is keen to sell as soon as possible, downward pressure on the price looks set to continue.
Another point is that there is no guarantee that all or parts of RBS have a long-term future. It is a rule of business, especially in banking, that a company doing nothing that others aren’t doing and which would not be missed if it disappeared is probably finished, and today’s banking market is relatively crowded.
At any rate, RBS actually is about to disappear – but only because top management have decided to rename the company NatWest Group. Perhaps that will perk up the stock price – or perhaps not.