RBS Will Re-Privatize Sooner Than Expected

Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) has reached an agreement with HMT (Her Majesty’s Treasury) to retire the Dividend Access Share (DAS) policy that had given the government preferential dividend rights and will allow the bank to become fully re-privatized ahead of schedule.

In 2009, the British government bought 51 billion B shares of Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) that gave it the right to dividends equaling the greater of a 7% yield on the B shares par value or 250% of the common share dividends. At the time, the British government said that it wouldn’t sell the shares back for less than 600p in 2014 or 650p from 2015 forward (60p and 65p respectively at the time). The ‘share price trigger’ would happen when RBS’s stock price was above that level for at least 20 days in a 30 days period, but now this policy has been dropped and HMT will be able to convert the B shares to common stock and start selling when it deems appropriate.

This gives Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) more room to decide what dividend policies are in all of its shareholders’ best interests without having to give such a disproportionate amount over to the government because of the DAS.

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Effective RBS carry price around 330p

“While we do not believe that the government has to be fully in the black on its RBS shareholding before starting to sell shares, it wouldn’t hurt if it was close,” writes Jefferies analyst Joseph Dickerson in an April 9th report. Dickerson gives Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) a Buy rating with a 414.00p 52-week price target (well below the 650p trigger price that has now been abandoned).

While the British government paid 502p for the B shares, Dickerson calculates that its carrying price is 408p, “a slightly convoluted notion, this figure is further corroborated by the Parliament’s Treasury Select Committee and the annual report of the UKFI,” he writes. When this is adjusted to account for the £1.5 billion that RBS will pay in exchange for dropping the DAS, the effective carrying price drops to 330p per share.

RBS will likely cross 330p by next year’s election

With Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) trading at 302p right now, the government would still be taking a loss if it started selling, according to Dickerson’s calculations, but he doesn’t think it will take action until after the spring 2015 general elections anyways. Even if his price target is optimistic, it will only take moderate growth for RBS to cross the 330p mark necessary for the British government to justify selling its stake.