Barclays note evaluates reprivatisation of state-backed banks, RBS break up unlikely

A Barclays research note into the condition of state-backed banks, Lloyds and RBS, evaluates the possibilities for eventual reprivatisation.

Government sale is often considered to have an important bearing on share performance, and here many often use Citi as a case study.

As Lloyds, in particular, nears the beginning of a government sell-down, whether the shares underperform or outperform through this process is a key investment consideration. Citi’s c30% outperformance of the US Bank sector in 2010 when the US government sold down its c30% stake over 8 months is often cited as proof that these transactions drive share price outperformance – but this isn’t always the case.

Having looked in detail at 6 major phased government divestments of banks and other companies across 5 jurisdictions, Citi’s outperformance looks to be the exception rather than the rule. More commonly, the initial tranche of a sell-down does well with much weaker performance as the process progresses and the sell-down takes years rather than months.

A recent Parliamentary Commission on Banking Standards draft report seen by the BBC's Robert Peston called for the split of lender RBS. Barclays' Credit Research view suggest that such a move would be unlikely:

We do not believe a break-up of Royal Bank of Scotland will occur. While there are various alternative legal structures that could be considered in the context of a break-up, none of them effectively satisfies the goals that we believe the government is seeking to achieve.

As for when privatisation might be achieved, Barclays' Equity Research team thinks stake sales may begin shortly:

The PRA’s sign off of Lloyds and RBS capital plans without the need for further capital raising marked a major step forward in the UK regulatory environment. We believe that earnings are now also on a sustainable growth trajectory for both banks and that combined with strengthened balance sheets this should allow dividend resumption for both at the end of 2014. These milestones in the rehabilitation of the two banks should also enable the government to begin selling its stakes shortly.