Resurgent RBS is ready for a privatisation to lift spirits

Bailed-out bank is confident the taxpayer will see a profit in sell-off

Royal Bank of Scotland has returned to profit and says it will be ready for a privatisation next year.

A pre-election sell-off involving a public whose funds have kept the bank from bankruptcy could provide a much-needed shot in the arm for an embattled Government that has just taken a drubbing at the polls.

It would also provide a boost for RBS, which yesterday reported an £826m pre-tax profit for the first three months of 2013, the first quarterly profit since the third quarter of 2011.

The bank is desperate to be free from Government interference as it battles back to full health. Some £45bn of state funds has been poured into RBS.

Chief executive Stephen Hester said a share sale might have to be conducted in several tranches given the size of the Government stake — it holds 81 per cent of the shares — and it might have to take a loss at first.

But Mr Hester said he was “confident” that the taxpayer would be in profit “at the end of the process”.

The City took a sharply different view, marking the shares down with the bank still facing a mountain to climb if the Government wants to sell at a price even close to its 500p buy-in. RBS fell 17.5p to 289.8p.

Analysts remain sceptical of the bank’s attractions to private investors and core operating profits of £1.3bn were well below last year’s £1.6bn.

While retail and commercial bank profits rose, and bad debts fell, the investment bank’s earnings were sharply lower as RBS continues to shrink what remains the most controversial part of the business.

An upbeat Mr Hester told the Independent that despite the difficult economic situation, RBS is now in a position where he is confident that it won’t be knocked off course.

“I think we are enough progressed in the clean-up job that the plausible economic scenarios will present bumps in the road rather than knocking us off course,” he said.

“I don’t worry so much about completing the clean-up. I think we will do it.

“The issue now is, can we turn a normal bank into a really good bank?”

Mr Hester knows that for the bank to really start to motor, however, he needs the economy to pick up, and that remains a work in progress.

Ian Gordon, from Investec, spoke for the sceptics when he said: “We regard the RBS results as profoundly weak. Core UK retail and UK corporate still contribute negative loan growth.

“Markets division was awful with a 40 per cent revenue hit (over the first quarter of 2012) without adequate relief on the cost line. In truth, we regard all the noise over the past 48 hours around the so-called ‘privatisation’ of Lloyds and RBS as a complete smokescreen.”

A key driver for a sell-off of RBS could be a return to dividend payments. That would require buying off the Government’s “dividend blocker” with European Union agreement when the  regulators are sufficiently confident that the bank holds enough capital to protect it from economic shocks.

The bank said its loan-to-deposit ratio had improved to 99 per cent. It hopes its core tier one capital ratio under banking supervisors’ Basel III agreement will be above 10 per cent some time in 2014.

The bank still has work to do, including the sale of just over 300 branches under the Williams & Glyn’s brand.

This sale was demanded by EU regulators as the price for the state support the bank has received.

RBS also has to dispose of its 48 per cent stake in the insurer Direct Line and potentially a partial sell-off of its United States retail bank Citizens.

Mr Hester said a pre-flotation sale of part of Williams & Glyn’s could happen as soon as this summer but a full sell-off would not happen until 2015.

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