NatWest: Mass free stock offering could revive UK share ownership culture

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David Cameron is still prime minister. George Osborne is the chancellor. We are years away from the horrors of the Russia-Ukraine war and the Covid pandemic. Brexit is just a twinkle in the eyes of Eurosceptics.

It’s 2013 and, five years into the height of the global financial crisis, the UK government is still struggling to figure out how to extricate itself from the gigantic stakes it holds in the country’s biggest banks following the huge bailouts of 2008.

Prickliest of all is the vast stake in RBS – 84% at its peak – which it received in exchange for its £45.5bn bailout of the Scottish lender, the largest bank bailout in the world.

Enter Policy Exchange, the Treasury’s favorite think tank, e a plan – adapted from an earlier idea by Portman Capital and the Liberal Democrats – to distribute shares to the people of the UK in one fell swoop.

Distribution would be free to any adult who registered, but would rely on a warrant-like structure that would only be worth money to recipients if the share price exceeded a minimum price; when the instrument was sold, that minimum value would pass to the Treasury and any upside retained by the individual.

The idea was considered, but rejected, as too complicated and potentially harmful to taxpayers. A decade later, there’s good reason to reconsider.

The most obvious is necessity. RBS, now rebranded as NatWest, is still 41.5% owned from the Treasury. Since 2013, the stock has average traded barely half the average price of rescue. Eight years after the government began its drip strategy of selling small amounts of RBS shares to institutional investors and supporting share buybacks, it has offloaded less than half the stake and crystallized large losses in the process.

(The Treasury’s interest in NatWest is recorded in government accounts and the financial evaluation of the Office of Budgetary Responsibility. Based on the bank’s total market capitalization today of around £25bn, the stake is worth just over £10bn, although after funding costs the exchequer is down £32bn net.)

But the logic of sticking to an original desire to recover the initial investment, or as close to it as possible, is not realistic: the asset was almost certainly overvalued at the time of the bailout; the bank has been deliberately reduced over the last decade and a half; and the operating environment for banks like NatWest has never returned to the boom times of the pre-2008 years. So NatWest’s peer ratings remain permanently low.

That said, the bank appears to be in better health than it was many years ago. Despite a tough economy, he recently reported a 49% increase. in pre-tax profit for the first quarter of the year, beating forecasts. It is time for the government – and those who consider it, such as the National Audit Office – to accept that the basic price of the bailout is no longer a relevant parameter and that other value-for-money criteria should be given priority.

All of this is a far cry from Cameron’s stated desire a decade ago to sell the stake “as fast as possible” and for a high price. Not doing so is politically embarrassing: for the state to own a bank, even partially, is not a good idea for conservatives.

The sell-off to date has been painfully slow: there has been a close focus on selling at prices that compare favorably with the bailout’s valuation and a fear of hurting the value of the remaining holding if the market is flooded with too many shares too quickly .

This means that a mass distribution all at once is the only way to exit the position in the short term. A standard Thatcherite clearance is one option; less risky, though more complicated, would be the distribution plan, using an intelligent structure to minimize price volatility.

A related reason for pursuing a mass selling strategy is the real, perceived, or potential risk of continued political interference in bank management.

Even under an allegedly non-interventionist Tory administration there have been instances, both in relation to bonus distributions and corporate strategy. There may be good reason to think that some water companies, utilities or rail services – many launched as part of Margaret Thatcher’s 1980s economic reforms – have fared poorly since privatization and may be better off in public hands. But banking – inherently risky and commercially oriented – is not suited for government ownership.

Besides the logical and political arguments, there would be technical advantages to exiting quickly. The very fact that the Treasury holds a 41.5 percent stake is a “jump” in the vicious circle: the market knows it will be sold at some point, flooding supply, so it reduces the value of the stock in the meantime. Distribution via a warrant structure would mitigate this risk because there would be no incentive for an individual to sell until the price moves above the floor.

At the same time, a distribution would trigger another technical lead for the title. Large stock holdings such as those owned by governments are generally ignored by institutional investors’ index weightings. As soon as the government’s NatWest shares enter the “float”, demand will sharply increase. According to Policy Exchange’s 2013 calculations, the index funds would have needed to buy shares equivalent to nearly half the government’s share at the time.

Prime Minister Rishi Sunak and Chancellor Jeremy Hunt have rightly prioritized stability in the wake of the alarming leadership of Liz Truss and Kwasi Kwarteng. But they also often talk about the need for economic dynamism, particularly how the City of London and the UK equity culture could be strengthened.

One effect of Thatcher’s privatizations of the 1980s, which were largely aimed at customers and staff, was that the number of UK retail shareholders increased from around 3 million to 10 million over the decade, according to the World Trade Organization.

It’s hard to get reliable data on how the numbers have evolved since then, but in general they appear to have ebbed and flowed in line with economic prosperity. It dropped sharply after the 2008 financial crisis.

More recently it has picked up a bit again as a new generation of investors have bet on “meme” stocks (although that trend – which has echoed the trend for cryptocurrency trading – has little to do with sustaining fortunes). of UK long-term companies). Recent Polls of financial group Wesleyan suggests that the retail shareholder count has stagnated at just over 7 million.

What better way to accomplish the important mission of reviving a jaded equity culture than to use a reprivatization of NatWest as a means to launch a new, improved 1920s version of Thatcher-era sell-offs and the equity democracy they promoted?