Two Failed RBS Divestitures Now Face Different Fates


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The Royal Bank of Scotland ( RBS ) has seen two significant setbacks in its asset divestment plans over the last fortnight after the acquisitions deals with Santander ( SAN ) and HSBC ( HBC ) fell through in quick succession. (( Statement on disposal of UK Branch-based Business , RBS Press Releases, Oct 15 2012)) (( Disposal of Indian Banking Operations , RBS Press Releases, Nov 30 2012)) RBS had been working closely with Santander on separating the operations of 316 of its branches in England, Wales and Scotland since the deal was announced in August 2010, but the latter gave up last month stating difficulties in the separation process. More recently, HSBC's agreement in July 2010 to acquire RBS's Indian Retail & Commercial banking operations also expired. While the branches in the U.K. has other suitors and will likely see a deal soon, RBS will wind down its operations in India.

We maintain our $9.50 price estimate for RBS's stock , which is in-line with the current market price.

See our full analysis for RBS's stock

The U.K. Business Will Most Likely Change Hands Early Next Year

One of the conditions laid out by the European Commission ( EC ) at the time of RBS's bailout in 2009 was that the global diversified banking group will exit its branch-based businesses focusing on certain SME and corporate activities in the U.K. This divestiture requirement affected 316 of the group's branches - 311 RBS branches in England & Wales and 5 NatWest branches in Scotland.  These branches had about £21.7 billion ($34.8 billion) in customer deposits and nearly £18.7 billion ($30 billion) in outstanding loans at the end of H1 2012 - making it a sizable part of RBS's core business banking division which reported $178 billion in outstanding loans at the end of 2011 as shown in the chart above.

The deal with Santander was struck at £1.65 billion ($2.6 billion) in mid-2010, but did not go through when technology and separation related complexities deterred the process. While the good news for the business is that RBS still has a list of potential buyers who are interested in these branches - Nationwide, Virgin Money, J.C. Flowers and Corsair Capital among others - the deteriorating economic conditions in the region and the declining profitability of the business over recent years could mean that RBS will have to settle for much less than what Santander had offered more than two years ago.

The Indian Business Isn't Going To Be So Lucky

In July 2010, RBS announced its decision to sell-off its Indian operations to HSBC - a deal that was seen as a win-win for both the major U.K.-based banks with RBS categorizing these operations as non-core and looking to get rid of it, and HSBC expanding its footprint in emerging economies. ((HSBC Holdings PLC - Acquisition of RBS businesses in India, RBS Press Releases, Jul 2 2010)) But the deal which was expected to close in early 2011 never took off when HSBC got caught up in a financial turmoil that forced it to slowly exit many of its global operations. Left hanging, the deal expired on 30th November this year, prompting RBS to wind down the operations to fulfill its commitments to shrink its non-core asset base over coming years.

The operations in India are a tiny part (~0.5%) of the £65 billion ($100 billion) in non-core assets RBS still holds and contributed to less than £50 million ($80 million) towards the group's revenues over the first three quarters of the year.

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This article appears in: Investing , Investing Ideas , Stocks , US Markets
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