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RBS opens 'new chapter' with stake sale, but further work needed, analysts say

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RBS opens 'new chapter' with stake sale, but further work needed, analysts say

The U.K. government sold a 7.7% chunk of Royal Bank of Scotland Group PLC in the week of June 4, hastening its reprivatization, but the lender's restructuring is far from finished, with more work needed on technology and small business lending in particular, according to analysts.

The British taxpayer now owns 62.4% of RBS, having received £2.5 billion from the latest accelerated bookbuild, or 271 pence per share — a discount to the June 4 closing price of 281 pence per share and the 502-per-share price at which the government took a majority stake at the height of the financial crisis in 2008.

It may carry out another stake sale that would make it a minority shareholder by the end of 2018, a source told The Times of London. The Treasury declined to comment to S&P Global Market Intelligence.

SNL Image

RBS CEO Ross McEwan

Source: Associated Press

Focus on speed

The government is focusing on speed rather than maximum value, in order to drive down the country's public debt by avoiding borrowing more for current expenses, said Laith Khalaf, a senior analyst with Hargreaves Lansdown in Bristol.

It was "only natural" for the bank's share price to fall by some 5.3% on the day after the government's private placement, Khalaf said, based on the price for which shares were sold to the institutions overnight.

"It only reflects the discount to the previous market price that the government offered," he said.

Despite the incremental privatization and a settlement with the U.S. Department of Justice over financial misconduct in the period leading up to the crisis, the bank still has much work to do to fully recover from its collapse, experts have said.

The share sale opens a "new chapter" for RBS, but the bank still needs to improve its technological infrastructure and better manage its branch network, Khalaf said.

CEO Ross McEwan was criticized during the bank's annual general meeting on May 30 over a decision to close 162 branches that investors said would hurt customers. The decision came after another 259 closures were announced in December.

"The bank needs to get itself in better order," said Khalaf.

SME lending

RBS should also be lending more to small and medium-sized enterprises, an area where it was traditionally strong but has lately been losing market share, said Joe Dickerson, a London-based analyst at investment bank Jefferies.

"One of the major areas of focus for management should be turning around the SME offering and getting satisfaction levels up in this segment as the promoter scores are poor," Dickerson said.

RBS has been subject to litigation and regulatory investigations into its crisis-era small business workout unit, known as the Global Restructuring Group or GRG, over suspicions that it deliberately bankrupted SMEs in order to liquidate their assets.

As the financial crisis weighed on the bank, GRG had engaged in a "dash for cash" to the detriment of some of its clients, according to internal documents that were leaked in the press. The bank launched a compensation scheme for affected business owners.

The bank should also increase rewards for investors this year, said Dickerson, with as much as £5 billion available for distribution.

RBS was unable to sell off a part of the business known as Williams & Glyn due to a lack of appropriate IT infrastructure, leading to a costly remediation from the European Commission. RBS opened a £425 million SME lending fund to rival banks in 2017 on orders from the European Commission's competition authority.