Britain’s finance minister, Chancellor of the Exchequer George Osbourne, delivered his closely watched annual Mansion House Speech to bankers in London on Wednesday night, and he left no doubt that he and the rest of U.K. Prime Minister David Cameron’s cabinet want the Royal Bank of Scotland to sell off Providence-based Citizens altogether.
UK Financial Investments, the company created to manage taxpayers’ stake in RBS and other bailed-out banks, has “made it clear that the government has no strategic interest in RBS owning one of the largest regional banks in the U.S. – and the method of exit from Citizens must achieve maximum value for all shareholders,” Osbourne declared in the speech.
While it was hardly a secret that Osbourne wants RBS to get rid of Citizens, the chancellor’s decision to make the demand publicly will ratchet up the pressure on the bank’s board, which so far has only planned to float a 25% stake in an IPO next year.
The dispute over what to do with Citizens comes down to a basic disagreement. The U.K. government wants Royal Bank of Scotland to simplify its business and focus its lending on British businesses, partly to speed up its privatization; RBS executives don’t want to sell Citizens under pressure for less than it’s worth, and they’re likely unhappy about what a Citizens sale would signal about the bank’s shrinking ambitions globally.
“It should be a UK and European commercial bank with an investment banking operation that supports its clients,” one unnamed Osborne ally told the Financial Times.
That disagreement looks like a big reason why RBS CEO Stephen Hester is stepping down – and, adding to the turmoil, one of the names being floated to replace him is Bruce Van Saun, the executive who is supposed to become Citizens’ new CEO this fall. Hester is still making the pro-Citizens case as he heads out the door.
“There is a positive case for Citizens as part of the long-term [RBS] business mix,” Hester told The Daily Telegraph’s Kamal Ahmed in an exit interview last weekend. Osbourne has suggested breaking up RBS by dividing its good assets and bad assets; according to Ahmed, Hester argues in Citizens’ case “that an asset exposed to a recovering American economy and with room – denied in the UK – for expansion is not a bad asset.”
But as City A.M.’s Allister Heath writes, Hester isn’t the one calling the shots, which makes it “glaringly obvious” why the CEO is leaving. “Forget about the spin: Osborne is in charge (though how that tallies with his view that only experienced financiers should run City firms is unclear),” Heath writes. “He publicly ordered RBS to sell its Citizens business in the US last night.”
Meanwhile, Moody’s Investors Service lowered its outlook for Citizens from stable to negative on Wednesday, which the rating agency said “reflects increased uncertainty about its future profile because of the heightened uncertainty surrounding the direction of its parent.” Moody’s described Hester’s departure as “the most immediate manifestation of the rising uncertainty at the parent.”
On the plus side, Moody’s said, “RBS Citizens’ financial profile is supported by high capital ratios and solid asset quality relative to peers. However, its profitability although improving, is below average.”
• Related: Citizens Bank’s future cloudy as spin-off announcement looms (Feb. 27)