Royal Bank of Scotland Group (The) (RBS)


Abu Dhabi reportedly ends interest in RBS shares

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It is being speculated that Abu Dhabi's alleged interest in acquiring a substantial portion of the UK government's 81% stake in Royal Bank of Scotland (RBS) has lapsed.

The rumours surfaced just one day after the bank reported a pre-tax loss of £5.2 billion, its fifth annual loss since it was rescued by the government in 2008.

The bank has been under pressure to find ways to raise capital and restructure ahead of an eventual reprivatisation. Prime Minister David Cameron, for example, recently called on chief executive Stephen Hester to "accelerate" reforms at the bank, which got a £45 billion state bail-out at the height of the financial crisis.

Unveiling the results on Thursday, Hester promised that the bank would be in a "condition fit to sell" before the next election in 2015.

"On one level, [Hester] is probably right," stated Ian Gordon, analyst at Investec. "Most, but not all, of the group's stabilisation, and fundamental repositioning, should have been completed by the end of 2014.

"But in our view, the group's financial outlook is incompatible with securing a UK Government exit remotely close to its 505.3p entry level."

He added: "We do not know what Abu Dhabi's investment criteria were then or are now, though we continue to see the biggest barrier to buying the stock – for the wider spectrum of potential investors - as a very slow, anaemic recovery in return on equity.

Gordon retained a 'sell' recommendation on the stock driven by "a very slow pace of 'core' balance sheet growth, limited net interest margin expansion and some still material ongoing legacy conduct costs." He also predicted that the return on equity will not cover the cost of equity before 2017.

But UBS analyst John-Paul Crutchley rated the stock a 'buy', explaining that the bank had three sources of value: "First the core business should, in time, be valued at a premium to tangible net asset value. Its return on equity (10%) will trend up as Irish losses fade and Ulster begins to deliver a normalised return.

"Second we forecast aggregate post-tax losses of £1.9 billion in non-core versus c£6 billion of capital tied up in the business which will be able to be released over time to improve ratios and in the longer term returned to shareholders.

"Third, post the initial public offering, the UK business and citizens should both trade at a premium to RBS's current multiple and provide a potential means of returning capital to shareholders," they explained.