Why RBS can’t be nationalised
The announcement by RBS yesterday that it expected to write down £28 billion was extraordinary.
Fears that the bank may be fully nationalised drove the share price down 67%.
However, the announcement was extraordinary not simply because it would represent the biggest single loss in UK corporate history – but also because of the timing.
The Royal Bank of Scotland is not expected to report on quarterly results until February 26th, so there was absolutely no need for the bank to make such an announcement.
Interestingly enough, it also came at a time when banks were being put under pressure to ensure they had fully written down all assets exposed to toxic debt.
Barclays had already lost 25% on Friday at suggestions that CDO’s the company held had not been properly written down, and discussions into the weekend suggested that all banks should make clear their write downs.
In that context, it will be interesting to see whether Royal Bank of Scotland has already made full write downs and this was the purpose of the announcement.
Like removing a sticking plaster in one painful go, instead of slowly and painfully, the Royal Bank of Scotland could have sought to get all of their worst news out at once, rather than drip bad news through the year.
Timing it to coincide with the government’s announcement of a bail-out package meant in theory the bad news could be better received if the government were backing the bad debt for RBS.
The fact that markets reacted badly wasn’t the size of the loss, but the fear that in giving the government a 70% stake in Royal Bank of Scotland, that the company was effectively going to become 100% nationalised soon – rendering the shares worthless.
However, there is little evidence that the UK government is going to 100% nationalise Royal Bank of Scotland anytime soon.
Here are the key reasons:
1. The government has invested over £15 billion in RBS shares. 100% nationalisation would mean this money would have to be written off, and the political fall out on that point alone would be horrendous;
2. The Royal Bank of Scotland has debts of around £1,900 billion. If fully nationalised, this debt would have to be added to the national debt, which last August stood at £637.4 billion, or 43% of GDP. Even totalled together at £2,500, there is also the £500 billion from the stimulus package to consider. Again, the political fall out could be instant death to any political party adding almost £2 trillion in debt directly on the nation. It would also be economic suicide and almost certainly cause the UK government’s credit ratings to be downgraded.
3. Nationalising a major bank such as RBS would undermine confidence in other UK banks, creating a domino effect that would leave the new Lloyds Banking Group ready to collapse, bringing another couple of trillion onto the national debt if forced to be nationalised.
4. RBS has decent capitalisation by existing standards, and is not at threat of immediate collapse, or similar conditions that would force the issue of a 100% nationalisation of the company. Instead, it is stock market investors who are spooked, but as we can see on the ridiculous market cap across UK banks afforded by current share prices, they are not being reliably valued.
5. Royal Bank of Scotland has massive consumer insurance operations which continue to be profitable, and were initially valued towards £7 billion at the end of last year – almost twice the current market cap of the the parent company!
While 100% nationalisation of the Royal Bank of Scotland has no doubt been discussed and explored, it remains political suicide for Gordon Brown and the Labour Party to consider turning the company over to full state control.
The government was heavily criticised over the rescue of Northern Rock and its billions of liabilities, so the chances of any political party rushing into rescuing a much larger bank and taking direct control of its trillions of liabilities seems remote.
There seems little reason to believe that any 100% nationalisation of RBS will take place soon, and that the government will look to ride out the current investor jitters.
Of course, I could be wrong – but then again, we need to see a compelling reason for 100% nationalisation to arise in the first place.