Last week Jeremy Hunt, Chancellor of the Exchequer, raised the prospect of the UK government selling its shares in high street bank, NatWest [LON:NWG] back to the public, which animated debate as to how this disposal would take place and whether the public as a whole has an appetite for the troubled bank.
The government has been a major shareholder in NatWest, one of the UK’s ‘Big Four’ clearing banks, since the 2008 Financial Crisis when it bought 54.7% of the company’s shares as part of a GBP45bn bailout. The government currently owns around 39%. As part of the 2008 deal NatWest International/RBS International, the group’s international trading arm sits outside the ringfence, as does NatWest Markets, the group’s investment banking arm.
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It’s not been a fun year for NatWest. The bank is rapidly disappearing from the High Street. It closed nearly 140 branches this year and has signalled its intention to continue the closure process in 2024. The bank issued a statement last week saying: “As with many industries, most of our customers are shifting to mobile and online banking, because it’s faster and easier for people to manage their financial lives. We understand and recognise that digital solutions aren’t right for everyone or every situation, and that when we close branches we have to make sure that no one is left behind.”
However, civil society organisations have criticised NatWest for its programme of closures, arguing that it discriminates against older people, who are more likely to use cash, small businesses that have high cash turnovers and people on lower incomes, who do not have access to technology.
NatWest has been closing accounts
But it’s not just branch closures that have seen NatWest and the RBS Group in the news, the bank has also been closing accounts with the highest profile case being the closure of sometime politician, pundit and Celebrity contestant, Nigel Farage’s account at subsidiary, Coutts Bank. Before donning his digger hat and disappearing into a jungle, Farage said that he was going to sue NatWest Group for loss of reputation and legal costs, a suit that could run into millions of pounds.
Farage-gate cost NatWest its CEO, Alison Rose, who herself lost GBP7.6m in bonuses and awards as it was deemed that she broke confidentiality agreements when she discussed Farage’s accounts with a BBC journalist. The data breach was subsequently pinned upon the corporate, NatWest as a data controller, as opposed to Rose personally, the Information Commissioner was at pains to point out.
Coutts also lost its chairman, Peter Flavel.
Dividends and a buy-back scheme
The bank presumably would have been quietly pleased to have saved GBP7.6m in the short term (though litigation may end up costing it significant amounts, especially if it evolves from a single case into a class action) as the bank hasn’t just been having problems reputationally, but also in the business sense.Operationally in September NatWest ‘lost’ numerous cash deposits in its customer’s accounts, due to a digital fault – the customers were subsequently reimbursed, and last week the bank also ‘lost’ nearly GBP1m from its Cash ISAs due to transfer delays, whereby customers transferred cash into their ISAs, but the deposits weren’t logged but held in a bank’s holding account for months on end, earning interest for NatWest as opposed to their customers.
But the fact that NatWest has performed poorly as a share is the biggest issue with this sale. One year ago, NatWest was trading at 254.6p. This morning (27th November) the bank’s shares opened up at 205p, down 19.5%. Over five years, they have hardly moved from 200.16p and pre-banking crisis, (27th November 2007), where NatWest was trading at 3,525.85p, shares are nearly 95% down in value. That’s a lot of ground to make up.
The company has tried to win around its shareholders, declaring a 5.5p dividend and launching a GBP500m share buy-back in July, after Rose’s resignation. The sour taste in many investors mouth was also sweetened with the bank reporting a GBP3.6bn profit on the back of rising interest rates, up from GBP2.6bn for the six months to end-June 2022 and ahead of NatWest’s guidance of GBP3.3bn. However, with the possibility of interest rates falling back as inflation cools, and rising impairments as the cost of living crisis affects families in the UK and house repossessions, business failures and loan failures increases, this might be a high watermark on a falling tide.
NatWest shares slump after Q3 trading update
This began to play out as NatWest shares slumped again last month following a disappointing 3Q23 trading update, with the bank reporting falling net interest margins and lower profits when compared to 2Q23. The company reported net interest margins of 2.94% pared back from 3.11% – and this is before the Bank of England has even hinted that it’s recommending a rate cut. Guidance for net interest margins was adjusted downwards.
Operating profit also fell to GBP1.33bn against GBP1.77bn for 2Q23 on the back of greater competition and pressure on the bank’s mortgage business. The Farage issue is not really the point, it is a distraction but the longer term picture is that NatWest isn’t in a healthy place. How this will play out when the government comes to market with its offer to sell its holdings in NatWest is the big question.
UK government looking for wins
It’s not been a fun year for the British Government either, lest we forget that this time last year we were still talking about that Liz Truss mini-budget that wreaked havoc with the economy. Subsequently the government has been battling to fight fires – many of its own making – and seems to be stuck in quicksand with a general election looming in the next year. An election – if it were held today – would be a wipe-out for the incumbent Conservative Party.
The sale of NatWest shares looks like the government is doing something positive, claiming that its clever management saved NatWest from the wilderness (although it was the last government that instituted the bank bailout) reinvigorated it, and it is now ready to release it back to the markets and let it fly free, able to power a new era of economic growth and health. The government will also be trying to show how its ‘getting value for the taxpayer’ and although the money it might raise from the sale would be a microscopic drop in a vast ocean of national debt, this government needs every little win it can claim.
Thing is, it’s a hard sell as NatWest looks like damaged goods – that crate of bruised mangoes at the bottom of the stack, which the greengrocer is trying to sell in the last quarter-of-an-hour before he packs down his stall.
Investors will see NatWest for what it is, especially as retail investors are a lot more sophisticated than they were ten, fifteen or twenty years ago and the price the government needs to make a statement, is probably nowhere near what the market will value NatWest at.
Susannah Streeter, head of money and markets for Hargreaves Lansdown said: “Retail investors are assessing the prospects for NatWest as the government plans on a share sale. It is encouraging that the Chancellor is proposing to include retail investors, but he’s also promised value for money for the taxpayer. So, it’s likely that the share sale won’t take place until NatWest’s share price has recovered somewhat, having fallen by around a third since January.”
Losses covered by the taxpayer
The Times reported this morning that the government may lose GBP28bn selling its shares in NatWest. In 2008 the government paid around GBP5 a share for its stake of around 84%. It has reduced that, but sold at a much lower price than what it bought for, the loss being covered by the UK taxpayer. Since then a succession of directors have taken more than GBP50m in bonuses, despite the bank haemorrhaging value, including the sale of its payment subsidiary RBS Worldpay for GBP2bn, which was then sold on five years later for GBP5bn and then sold again for GBP8bn.
Moreover, taxpayers have had to fork out for the group’s misconduct fines – around GBP700m, fines incurred for manipulating the forex market, rigging interest rate benchmarks and not monitoring vast cash deposits to small businesses.
Given the charge sheet, whatever the Chancellor of the Exchequer is thinking his government might benefit from this disposal, it is unlikely to play out the way he dreamed it.