RBS Restructuring Fails to Boost Bank

Royal Bank of Scotland regional holding Citizens Financial has filed for IPO, but analysts are maintaining their share price estimate as the subsidary is not worth much

Erin Davis 14 May, 2014 | 5:18PM
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Citizens Financial, a U.S. regional bank owned by the beleaguered Royal Bank of Scotland (RBS), filed papers in the U.S. on Monday for an initial public offering of its shares. The move came as no surprise, as RBS announced in late November that it planned to IPO Citizens in 2014 as part of the group’s accelerated restructuring. We plan to maintain our fair value estimate for the no-moat bank.

We don’t see the sale of Citizens as a big boost to RBS for a number of reasons. First, Citizens has been neglected by RBS' top management for years as management dealt with the group’s more existential problems, and, as a result, Citizens is underperforming other U.S. regional banks, posting returns on equity of only 7%-8%, compared with the 11%-14% we’d expect to see from a well-run U.S. regional bank.

We therefore don’t expect Citizens’ sale to garner a significant premium to book value; in fact, we think that the bank is likely to be valued at or below its $13 billion tangible book value. Second, while RBS is pursuing a dual-track offering for Citizens, in which the bank will be open to either an IPO or a sale, we don’t see any buyers that are likely to bid for the whole bank.

We therefore think the IPO is likely to go through, as we see this as a second-best option for RBS – the group plans to IPO only 20%-25% of Citizens, and the share sale will accordingly provide a much smaller boost to capital than would a wholesale sale.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
NatWest Group PLC399.80 GBX0.71Rating

About Author

Erin Davis  is a senior banking analyst for Morningstar.

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