State-backed Royal Bank of Scotland (RBS) wants to abandon the planned sale of its Williams & Glyn (W&G) unit after a seven-year struggle to sell the small business lender to meet European Union state aid demands.
Instead, the high street lender, alongside the HM Treasury, is looking at setting up a £750m fund aimed at supporting challenger banks to meet the funding needs of smaller businesses. The share price has jumped more than 6% on the announcement to 257.8p, its highest level in more than a year.
‘Today's proposal would provide a path to increased competition in the SME market place,’ says RBS CEO Ross McEwan. ‘If agreed it would deliver an outcome on our EC State Aid divestment obligations more quickly and with more certainty than undertaking a difficult and complex sale and would provide much needed certainty for customers and staff.’
More not less certainty is always welcome news to investors, hence today’s share price rally.
RBS, currently 73%-owned by the UK taxpayer, plans to book a £750m extraordinary provision within its fourth quarter 2016 results.
W&G sale out, SME support in
The bank explains that today’s news ‘will deliver the following revised package of remedies to promote competition in the market for banking services to small and medium enterprises in the UK.’ They are:
1) A fund, administered by an independent body, that eligible challenger banks can access to increase their business banking capabilities;
2) Funding for eligible challenger banks to help them incentivise SMEs to switch their accounts from RBS paid in the form of dowries to eligible challenger banks;
3) RBS granting business customers of eligible challenger banks access to its branch network for cash and cheque handling, to support the measures above; and
4) An independent fund to invest in fintech to support the business banking of the future.
Acceptance of the new proposals is not a foregone conclusion. According to HM Treasury, the Commissioner for EU competition policy will propose in the coming weeks that proceedings be opened to gather evidence on a new plan. Approval, amendment or denial would follow - in much the same manner as in the last amendment to RBS’s state aid settlement in 2014.
‘A proposal which removes the technically challenging task of transferring W&G customers to a buyer should make the process of complying with State Aid requirements less risky for shareholders,’ point out analysts at investment bank UBS today.
Dividends to make a comeback?
Intriguingly, UBS also hints that this could be a major step that could return RBS to the dividend list, something shareholders have long awaited. Long-suffering RBS investors have not received a dividend since the government bail-out in 2008, in the teeth of the global financial crisis.
UBS analysts do not currently anticipate dividends from RBS this year to 31 December 2017, although the consensus anticipates a 1.15p per share payout this year. Once dividends are back on the menu most analysts expect rapid growth in the payout. Consensus estimates a payout of more than 10p per share in 2018, implying a rough 4% income yield.
