Tuesday, 1 September 2009

Looking Forward To Pay Day

A couple of days ago, we commented upon the fact that the Swiss Government had been able to exit from the bailout that it had injected into the bank UBS (see report). This set me to wondering how much the UK taxpayer might expect to receive once the UK bailouts have unwound. We decided to focus upon RBS (the Royal Bank of Scotland) for a couple of reasons. First, it is the largest independent recipient of taxpayer funding, which rather puts it in the spotlight at the moment. Second, there appear to have been some major issues concerning risk management during the months leading up to the credit crunch that need to be resolved. And finally, the former CEO, Sir Fred Goodwin, has come to symbolise greed and excess in the UK.

Over 2008 and 2009, the UK taxpayer acquired an equity stake in RBS in the region of 68%, and at a cost of £20 billion. The stake was acquired at a variety of prices, but the average is held to be 50.5p per share. On Friday, the shares closed at 57.65p per share, which has an implicit valuation of £22.83 billion – a latent gain of about 14%. Of course, the government is unable to realise that gain at the moment. RBS is too weak to do without taxpayer support, which means that public involvement will continue for some time to come.

When the time comes to sell the holding, how much might the taxpayer expect for the holding. If we assume that the dividend is restored to the 2006 level of 30.2p per share, and if we assume that UK base rates are 5%, then the implicit value of the share using the CAPM model is 604.0p. If that is the case, then the UK holding in RBS would be valued at £239.2 billion. Of course, RBS may not pay a dividend as high as 30.2 per share, or base rates may be higher or lower than 5%, all of which will affect the final valuation of the UK stake in the bank. However, that is not the point. The point is that the potential for capital gains from the UK bailout of RBS is huge.

Now that’s a pay day that we can all look towards!

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