Analysts say Royal Bank of Scotland's operations in the United States could be put up for sale if the bank's new owner -- the British government -- decides that the ailing institution must sell assets to raise cash.
Citizens Financial Group, of Providence, R.I. -- parent of Citizens Bank of Pennsylvania -- could draw bids of up to $14 billion, Gerard Cassidy, a banking analyst with RBC Capital Markets, believes.
"Citizens has about $97 billion in deposits, so with a deposit premium between high single-digits and 13 percent or 14 percent, you're looking at a range of about $7 billion and $14 billion," Cassidy said.
Citizens Financial Group offers a potential acquirer a branch network stretching from the Northeast through the Midwest. Unlike many American banks, however, it wasn't financially pummeled with a portfolio of bad mortgages.
Citizens has 128 branches in the Pittsburgh region, second behind National City Bank's 158. Citizens holds about 8 percent of the region's consumer deposits, making it the region's fourth-largest bank. Citizens came to Western Pennsylvania in 2001, when the Royal Bank of Scotland acquired then-Mellon Financial Corp.'s retail banking business.
Citizens spokesman Michael Jones couldn't be reached for comment Wednesday.
Merrill Lynch & Co. also believes Royal Bank of Scotland might sell Citizens Financial to buy back shares from the government.
Selling Citizens "would provide RBS with a significant opportunity to shrink its balance sheet, and we think that the capital freed up could be used to buy back and cancel the U.K. government preference shares," analysts, including Manus Costello, wrote in a research note to clients.
The sale is "one of the most likely" over the next 18 months, Costello said.
"We anticipate that the British government will mandate the Royal Bank of Scotland shrink the size of its asset base within the next 12 to 36 months," Cassidy said. Last month, the British government acquired 57.9 percent of the bank's common shares, plus a block of preferred shares for about $31 billion.
Cassidy said he doesn't believe the U.S. operations would be the first piece of the Royal Bank to be divested.
"We see the expected sell-off of the riskiest businesses," he said.
Royal Bank also might sell the company's Bank of China stake, its insurance businesses, form a "bad bank" for structured credit assets and run down its global banking and markets division, Merrill Lynch's Costello said.
Citizens Financial in 2007 contributed about $2.6 billion of Royal Bank of Scotland's $20 billion in pre-tax profit, and 8 percent of its $53 billion in revenue.
"However, in a distressed financial market like we are in now, sometimes you have to sell off the most saleable assets, and if the British government says it wants the bank's franchise pulled back to the U.K., and the Continent, and perhaps South America, then Citizens could be put up for sale," Cassidy said.
An unidentified British analyst told American Banker yesterday: "I think the government is much more interested in seeing RBS focus on being a U.K. company than it is in the international ambitions of RBS." The analyst also told American Banker that Royal Bank of Scotland probably would wait until late next year to sell Citizens to get the best price.
Cassidy said there are five banks that would put money on the table for Citizens Financial, including:
• Citigroup Inc., still smarting from losing Wachovia Corp. in October to Wells Fargo & Co.
• Financial services firm Morgan Stanley, which in September was approved by the federal government to become a bank-holding company
• Toronto, Ontario Canada-based TD Banknorth
• Spain's Banco Santander
• Buffalo, N.Y.-based M&T Bank Corp.
Under Fred Goodwin, who stepped down after eight years as Royal Bank of Scotland's CEO last month, the financial institution was an aggressive acquirer, spending some $90 billion to buy banks. Among Goodwin's buys were Mellon's retail business in 2001 for $2.1 billion; Cleveland's Charter One Financial Corp., acquired in 2004 for $10.5 billion; and last year's $18.6 billion deal to purchase the part of ABN Amro Holding NV.
Goodwin greatly overpaid for ABN Amro, analysts say, and it was responsible for much of Royal Bank of Scotland's loan losses and eroded capital base. Royal Bank lost $1.5 billion in the first six months of this year.
"I think Royal Bank's new CEO (Stephen Hester) will come out with his strategy within the next three to four months," Cassidy said.
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