RBS has moved a step closer to a healthier balance sheet after floating its US foothold Citizens Bank, writes Anna Milne
It stands to raise $3bn from selling Citizens after lowering the share price to $21.50 from its earlier target of $23 to $25 per share due to a lack of confidence amongst investors about Citizens’ outlook.
The Citizens IPO is set to be one of the biggest in 2014, after Alibaba and represents a 25% RBS stake. The move by RBS is to improve its balance sheet as Citizens falls under its risk-weighted assets. Offloading Citizens, albeit bit by bit, will increase RBS’ capital equity ratio in order to comply with its regulatory target by the end of 2016. A 12 month extension is available if markets are unfavourable.
As a condition of the British government buying the majority stake in the group, the European Commission required it to downsize its funded assets, focus on UK-only lending and increase its capital ratio by 2016.
For Citizens, while it won’t make a profit from the IPO, it is no doubt excited by the prospect of increased independence and will attempt to expand operations and boost profitability, despite doubtful forecasts. If it succeeds, RBS will benefit when it comes to offloading its remaining 75% stake.
Citizens was bought to gain foothold in the strong US economy back in the days of reckless ambition for RBS. The Rhode Island based bank went on to acquire several other American banks, including Charter One.
In December 2007, RBS’ funded assets were at their highest, at £1.56tn. By 2016-17, the aim is to have decreased this to around £600bn ($984bn) and therein increase its capital equity tier 1 ratio (CET1) to more than 12% (from 4.5%). RBS’ funded assets include risk weighted assets, of which Citizens is one, and these amounted to £609bn at the worst point in 2007. RBS aims to reduce this to about £300bn to reach its 2016 target.