Bank of Ireland forced RBS to buy its 23.5 per cent stake by using a put option set up when the two banks merged their US operations in April 1996. It will make a profit of Irpounds 153m (pounds 132m) from the sale.
The move by Bank of Ireland will fuel speculation that it is poised to make an offer for a UK building society. Likely candidates are the Chelsea, Skipton, Paragon and Norwich & Peterborough societies.
David Holden, the head of public affairs at Bank of Ireland, said: "We have indicated our interest in growing our presence in the UK mortgage market. But it depends on availability, price and the business."
Crucially, the exercise price of the option was as of 14 August, when the sale was first made public. That was before US banks slumped in value following Asia's worsening economic ills and the rouble trouble of the past two weeks.
RBS paid for the stake entirely in cash, causing its capital base to slip below the 6.5 per cent level normally considered "comfortable" by banks and by the Bank of England. Tier One capital fell by 90 basis points from 7.2 to 6.3 per cent.
George Mathewson, the chief executive of RBS, yesterday admitted that Bank of Ireland had been lucky to strike a deal at the appointed time. "I think the timing was a bit fortuitous for them. But the reality is that we are still paying a price which is pretty attractive."
Mr Mathewson declined to rule out a sale of all of Citizens to a third party. "Like all our assets we continually review it. But we now have 100 per cent of an excellent asset. At the moment our strategy is to continue organic growth."
However, he insisted that the deal was "not conditional" in the sense of being a necessary part of any further corporate activity. Bank of Ireland shares slid 10p to 900p, while RBS shares fell sharply from 845p to 824p.
RBS agreed the put option as part of the 1996 merger of Citizens bank with First New Hampshire, until then wholly owned by Bank of Ireland. Bank of Ireland also received $230m as part of the deal.
The price of the stake is more galling for RBS given the recent markdown in US banks. Bank of Ireland's stake was valued at $435m when it bought it in April 1996 and has slipped back since bank valuations peaked this year.
Some analysts had expected the price to be higher at around pounds 500m. With 100 per cent control of Citizens, RBS said earnings will be slightly enhanced, by 1 to 1.5 per cent.Reuse content