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Lloyds Banking Group and Royal Bank of Scotland: The big sell-off?

This week, both Lloyds Banking Group (Lloyds) and Royal Bank of Scotland (RBS) have announced encouraging results for the six months to the end of June. The two banks, which are 39% and 81% government-owned respectively, returned to profit and this has led to speculation that the UK government may look to divest its interests.

Lloyds’ results came first on Thursday (August 1st) and showed a £2.13bn (approximately $3.38bn) pre-tax profit. This signals a welcome return to form for one of the country’s so-called ‘Big Four’ banks and represents a great improvement on the £456m loss (approximately $722.6m) it posted for the same period in 2012. The bank’s shares were the FTSE’s biggest winner rising 8% to 74 pence ($1.17). This means that the share price now exceeds the 73.6 pence ($1.16) needed for the government to see a profit on its sizeable investment. So, will the government look to sell its stake?

The answer at this stage seems to be no as the government adopts a cautious approach and it is right to do so. As Lloyds CEO António Horta-Osório was quick to make clear, the decision is the government’s and he made repeated reference to the turbulence that affected the banking world in August 2011 as a result of Eurozone instability, underlining the fragility of confidence among bankers. For its part, the UK government has taken a guarded stance with Deputy Prime Minister Nick Clegg extolling the virtues of patience and making a considered decision. Mr Clegg stated “You don’t suddenly declare when you’ve heard the latest figures from a bank that you’re going to take this very very big step. It’s something that you want to do properly and thoroughly but our overall approach is very very clear; we want to put Lloyds back into the private sector.”

At this time, such an approach seems prudent as the shares are only trading marginally above the level required for the government to break even and the bank has still not confirmed when it will begin to pay shareholder dividends which may make investors reluctant to buy. Furthermore, the shadow of Payment Protection Insurance (PPI) continues to loom large over Lloyds, with the company announcing a further £500m (approximately $792.3m) provision for mis-selling claims. The only certainty following Thursday’s results announcement is that the sale of the UK government’s stake in Lloyds is now very much a question of when, not if.

Being 81% government-owned, RBS weighs heavier on the government and despite the promising results announced today (August 2nd), the divestment of its stake in the Edinburgh-headquartered bank seems much further away.

RBS announced pre-tax profits of £1.37bn (approximately $2.17bn) for H1 2013, a huge improvement on the £1.68bn (approximately $2.66bn) loss it posted for the same period last year. While this is welcome news for the government, the Scottish bank still has a long way to go before it can once again become fully privatized. The UK government has made no secret of its desire to reduce its interest in RBS and there were rumours of meetings with sovereign wealth funds in the Middle East last year. However, the time is not yet right for RBS to once again fall into private hands.

The company is currently undergoing a change of leadership as former Commonwealth Bank of Australia retail banking executive Ross McEwan comes in to take over from Stephen Hester and he has been tasked with steering the bank into private hands. The fact that he is not eligible to receive a bonus until the end of 2015 suggests that this is viewed as a long-term goal. Despite the profit made in the first six months of this year, the bank has recorded total net losses of around £12bn ($19bn) over the last four years and at 321 pence ($5.08), shares are trading well below the government’s target price of 407 pence ($6.45). These factors combined would make any move towards privatization in the immediate term premature and so you can expect to see RBS remain a majority government-owned bank for much longer than Lloyds.

For news an opinion on the Financial Services sector follow me on Twitter @NickMarketLine

For a SWOT analysis of Lloyds Banking Group, see the MarketLine ‘Lloyds Banking Group company profile‘.

For a detailed company analysis of Royal Bank of Scotland, check out the MarketLine ‘Royal Bank of Scotland SWOT analysis report‘.

Want more information on the UK banking industry? Check out MarketLine ‘Report on UK banking industry‘.

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