(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
By Antony Currie
NEW YORK, Nov 21 (Reuters Breakingviews) - Citizens Bank, a
fixture of the northeastern United States, is a prize asset. And
its owner, RBS (RBS.L), could be a forced seller. In theory,
that should mean a bidding war if the taxpayer-owned UK bank
decides to sell. But the need to pay cash, keep their own
investors happy and satisfy watchdogs may give buyers pause.
The U.S. bank's $120 billion of assets, $97 billion of
deposits and $82 billion of loans, mostly in New England, would
appeal to a number of regional U.S. banks from similarly sized
institutions like Fifth Third (FITB.O) and BB&T (BBT.N) to
larger rivals like PNC (PNC.N) and US Bancorp (USB.N). Then
there are the Canadians – TD Bank (TD.TO) is a prominent and
expanding player on the U.S. East Coast.
Having plenty of potential bidders ought to make a sale
appealing to RBS, which could do with more capital under tougher
Basel III rules and can no longer afford global ambitions.
Citizens' core operations only earned an annualized return on
equity of 8.1 percent in the first nine months of this year. But
that was better than crisis-related losses in previous years. An
improving bottom line plus willing suitors ought to mean
Citizens could fetch a price higher than its tangible common
equity – some $11.8 billion in 2011.
Bidders with overlapping operations might even be able to
offset most of that outlay by cutting, say, a third of Citizens'
$3.6 billion annual expenses. After tax, savings on that scale
could have a present value to the buyer of some $7.5 billion.
But paying for the deal is a problem. The UK would surely
want RBS to collect cash, not simply swap ownership of Citizens
for shares in another bank. To raise the money, any of the
logical buyers would have to sell so much new stock that it
would increase share count by at least half.
For the right deal investors would lap up new shares. But
that highlights another hurdle. Bank shareholders have gotten
used to M&A deals where the buyer pays less than book value,
regardless of cost savings. Against that recent history,
Citizens could seem expensive.
Another possible roadblock is U.S. regulators. They're
reluctant to approve deals that make even mid-sized banks
larger, as shown by the delay and close vote on Capital One's
(COF.N) takeover of ING Direct. Buying Citizens would push PNC
or US Bancorp well above $400 billion in assets, for example, or
bump BB&T up to $300 billion.
Carving Citizens up might defuse some of these concerns. But
British regulators may find it’s smart for the UK to make
selling Citizens a longer-term project.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- UK Financial Investments, which oversees the government’s
RBS stake, has discussed strategic options with the bank
including the sale of Citizens Bank, its U.S. unit. The British
regulator, the Financial Services Authority, has also
recommended that the bank consider selling its U.S. arm.
- Reuters: DEALTALK-After 30 U.S. deals, RBS may cut
Citizens adrift [ ID:nL5E8MC6R7]
Citizens Charter [ID:nL3E8M255G]
Not so direct [ID:nL2E8DEFWN]
- For previous columns by the author, Reuters customers can
click on [CURRIE/]
(Editing by Richard Beales and Emily Plucinak)
Keywords: BREAKINGVIEWS CITIZENS/
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