Royal Bank of Scotland raised £1.7bn yesterday by offloading its 4.3 per cent stake in Bank of China as it sells non-core operations and investments to reinforce its balance sheet. The sale took the form of a placing of the shares at a discount of about 7.5 per cent with institutional investors. RBS was set to officially announce the deal overnight or today.
The Edinburgh-based lender is undertaking a strategic review and will remain present in China, where it has 18 branches. But the deal will signal that it is ready to take action to raise cash to weather the economic downturn.
RBS has already written off billions of pounds in the last year and was hit hard by the market chaos that followed the collapse of the US investment bank Lehman Brothers in September.
It accepted £20bn as part of a bailout in October that has left the government holding a 58 per cent stake and now faces pressure to cut risky investments and free up cash to lend to UK businesses and consumers. "It's a signalling exercise, whereby they can say to shareholders, including the government: 'look, we are cutting back on our foreign exposure and doing what we can in the UK economy'," said Simon Maughan, a banking analyst at MF Global Securities.
Royal Bank of Scotland needs the cash all the more after revealing yesterday that its accounts will suffer from a $3.5bn loan exposure to the bankrupt US chemical company Lyondell.
It has also been trying to raise £7bn by selling its UK insurance units Churchill and Direct Line since early last year. However, the insurance sale has stalled and, while a deal could still be reached, chief executive Step-hen Hester is likely to scrap that sale to keep the units' cash flow rather than accept less cash than anticipated for the insurance units.
Western banks such as RBS had, during the four-year economic boom that finished in mid-2007, piled into emerging markets such as Eastern Europe and China as they ignored the higher risks and chased the growth that could be found there. Most Western countries are mature banking markets with little scope for growth.
However, many banks have recently sold off such investments as they retrench to focus on problems in their home markets and strengthen their balance sheets, meaning that RBS – which still has other operations in Asia as well as significant US interests such as the banking group Citizens – would be the latest overseas investor to sell a stake in a Chinese bank.
The Swiss bank UBS sold a 1.5 per cent stake in Bank of China last month. Bank of America sold a 2.5 per cent stake in China Construction Bank for just over $2.8bn last week. Those stakes were sold at a discount of around 12 per cent.
The sale will leave the Singapore state investment agency Temasek as the largest foreign investor in Bank of China, with a 4.1 per cent holding. Temasek also holds about 2.1 per cent of China Construction Bank, putting the Singaporean fund in a good position to exploit Chinese growth as many foreign rivals retreat.
The investment bank Morgan Stanley advised RBS.Reuse content