Investing
Would an RBS break-up be an opportunity for investors?
RBS has seen shares fall 5% today after George Osborne revealed a decision on its future is due in weeks, but is it a buying opportunity for investors or the right time to cash in?
RBS was the biggest faller in the FTSE 100 today with shares down 17.2p at 355p by mid-afternoon as investors panicked over the impact of a potential division of the lender into a ‘good’ and a ‘bad’ bank.
The bad bank idea is not new, having initially been suggested by Treasury Select Committee chairman Andrew Tyrie to help the bank ease problems stemming from European banking competition laws.
While the rescue of RBS back in 2008 was needed to prevent a full-blown banking catastrophe, the government’s continued support leaves the bank at risk of falling foul of competition rules for state-owned firms.
There are three options for the government – which owns 82% of RBS – if it opts to split the bank. It can set up a bad bank within RBS which is run independently, set up a bad bank supported by the Bank of England, or create an entirely separate bank for toxic assets.
The lack of detail about what a split might mean for investors has weighed on shares today, but is it all bad news, or is the sell-off an ideal time to invest in the bank at a lower price?
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Time to buy
Paul Mumford, fund manager at Cavendish, running the group’s Opportunities fund, said the sell-off could be a good buying opportunity.
He said: “The share price is down, but that is understandable, as people are not sure what to make of it yet, so the fall is a knee-jerk reaction. The markets may take a more considered view once there is more information and more meat on the bones.
“I do hold RBS, and this could be a good buying opportunity.
“The fact the government owns a large part of it is positive as it would be in their interest to make sure any changes are to the satisfaction of investors. They would not be pushing it through quite so quick if they thought it was dead in the water.”
Time to sell
Richard Hallett, manager of the Marlborough UK Leading Companies fund, is taking the opposite view.
The manager does not hold the bank in his fund, and said there is too much risk around the shares to invest now.
He said: “It is too messy and political at the moment, and too hard to read. They are trying to do the right thing, but I think it will be detrimental to shareholders, as it is not clear yet how shareholders will be rewarded.”
He said the costs of any restructure will likely impact shareholders, adding the break-up plan is not necessary.
“The break-up is not needed and is a cloud over the short- to medium-term outlook. I do not see the imperative for it to happen, especially as the bad debt is already reducing quite fast and it is well-financed and well-funded.”
Edmund Salvesen, deputy head of equity research at Brewin Dolphin, said his firm is cautious on the shares because of the range of challenges still facing the bank.
He said: “The market is spooked as it wants less government meddling.
“However, we ourselves are cautious because the bank still has some issues. It could be hit with a fine of around $4bn by the US authorities because of its exposure to the US mortgage crisis, so that is a concern, and we would prefer to see any litigation pass before we proceed.”