Citizens Financial, a U.S. regional bank owned by the beleaguered Royal Bank of Scotland (RBS), filed papers in the U.S. on Monday for an initial public offering of its shares. The move came as no surprise, as RBS announced in late November that it planned to IPO Citizens in 2014 as part of the group’s accelerated restructuring. We plan to maintain our fair value estimate for the no-moat bank.
We don’t see the sale of Citizens as a big boost to RBS for a number of reasons. First, Citizens has been neglected by RBS' top management for years as management dealt with the group’s more existential problems, and, as a result, Citizens is underperforming other U.S. regional banks, posting returns on equity of only 7%-8%, compared with the 11%-14% we’d expect to see from a well-run U.S. regional bank.
We therefore don’t expect Citizens’ sale to garner a significant premium to book value; in fact, we think that the bank is likely to be valued at or below its $13 billion tangible book value. Second, while RBS is pursuing a dual-track offering for Citizens, in which the bank will be open to either an IPO or a sale, we don’t see any buyers that are likely to bid for the whole bank.
We therefore think the IPO is likely to go through, as we see this as a second-best option for RBS – the group plans to IPO only 20%-25% of Citizens, and the share sale will accordingly provide a much smaller boost to capital than would a wholesale sale.
