Reuters Insider - Breakingviews: RBS' $14 bln pitch

Citizens Financial (Delaware)

08/09/2014 19:42

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 Source:             Thomson Reuters                                   
                                                                       
 Description:        Sept 8 - Jeff Goldfarb and Antony Currie dig into 
                     the rosy assumptions that the Scottish bank is    
                     baking into the upcoming IPO of U.S. lender       
                     Citizens Financial.                               
 
 
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Transcript (May be auto-generated)

 The Royal Bank of Scotland is getting top Dollar for its Citizens Financial Bank
of the United States four months after it listed to go public. It finally got 
the pricing down. It's going to have a $14 billion valuation. It's going to 
raise $4 billion. Pretty surprising given what the numbers tell us. Talk to us 
through what happened there. Well, we looked at this when it first listed its 
desire to go public. Yeah. And they are making awful returns last year. I think 
a 3% return on equity. So that's just abysmal. Which doesn't translate into a 
$14 billion valuation by- No, it doesn't. $14 billion is pretty much tangible 
book value. Okay. So- Now, if you think they've got to get a certain level of 
return on tangible book to be worth what- You would expect to see something like
10%. Exactly. 

So you're going to get 10%. So if you think- actually, they got 3% on common. 
They got a little bit higher on tangible last year. Look at the first six months
of this year, they're up to just over 7% return on tangible. So that- at least 
they're making progress, right? They've gone up a third or so compared to the 
first six months of last year. Right. That all sounds fine but then you look at 
the valuation they're putting on this. You think, okay, well, this is actually 
going to put you right on tangible book value. But why? How are you going to get
those turn out- Also, why have investors should have- really taken a shine to 
this? I mean, I guess, we don't know for sure but I mean, that's sort of when 
the indicated figures- 

I think RBS is pushing for- and don't forget, this is a bank that is almost 80% 
owned by the UK which needs to get money- Right, they need the capital. They 
actually need the capital and also they need it probably to pay various fines 
probably coming down the pike at some point for many other banks these days. So 
they're looking at four things: one, business growth. Fair enough, we'll talk 
about that. Two, we think that if interest rates go up by two percentage points 
in the next year or so, then we will get a 6.6% increase in net income which is 
great if it happens, right? Right. So number one, you've got- 

So these are some of the underlying assumptions here. Yeah. We think we can get 
back capital. We've got more capital now than our regional banking peers. But 
don't forget that this is one the banks that, although it passed the 
quantitative part of stress test though this year, it failed the qualitative 
part of the stress test. Right. So the chances the Fed say next year, "Yeah, you
can give capital back" at least as much as they want to give back is probably 
relatively slimmer unless they've done something fantastic. But obviously, the 
investors should have had a gauge on that. They're not probably expected- 
Exactly. What's number four? Then you've got cost cuts. Okay. And they reckon 
they can get their cost down from last year about 70%, just under 70% efficiency
ratio to 60%. I've looked to their numbers. They're a little bit off but I think
if you look at where they are the first six months this year, maybe they're 
getting there. 

But they think that will add an extra a percentage point or so to return. So 
essentially a lot of things that have to go right. Investors, based on the way 
the pricing is going on this IPO, think it's going to get there. Yes. But that's
a two-to-three trajectory they're giving for all of this. And okay, they're 
doing better in the first six months of this year, but also, they're relying, I 
think, on the fact that a few other financials that have gone public this year, 
whether it's the likes of credit card companies like Synchrony, Green Bank a 
community bank in Texas went public at a relatively decent valuation about a 
month or so ago. So this jumping on the bandwagon a bit as well, and who knows, 
there's always a chance if the Fed allows a few more mergers to go through like 
the CIT, that maybe they can- There's a buyer. Citizens can go and buy something
or be bought. Okay. Alright. We'll leave it there. We'll keep an eye on that IPO
which will be coming up soon. And we'll be back with more Breakingviews 
tomorrow