Royal Bank of Scotland Group plc's (LON:RBS) plans to scrap its sale of the Williams & Glyn (W&G) business could pave the way for resumed dividend payments but obstacles remain, analysts said today.
The bank wants to set up a fund to help smaller challenger banks instead of selling 300 W&G branches.
In a statement on Monday, RBS said the proposal would “provide a path to increase competition” in the small and medium enterprises (SMEs) sector. The 72%-state owned bank said it has already taken a £750mln provision within its 2016 results for the new proposal.
The European Commission’s Margrethe Vestager will ask the body to evaluate the proposal in the coming weeks.
Read: RBS rallies on plans to scrap sale of Williams & Glyn
Shares rose 6.27% to 257.60p in early trading.
UBS, Citi Research and Deutsche Bank said the plans could bring forward the lender’s ability to pay dividends. Under previous proposals, RBS was only able to pay a dividend until an exit from W&G was assured.
The European Commission has required RBS to sell the branches as a condition of its 2008 state bailout.
UBS said “a proposal which removes the technically challenging task of transferring W&G customers to a buyer should make the process of complying with state aid requirements less risky for shareholders”.
“The state aid task and the outstanding residential mortgage-backed security litigation issue are, in our view, the two remaining impediments to restarting dividends,” UBS added.
The bank recently revealed it had set aside a further £3.8bn ahead of an expected fine from the US Department of Justice over the sale of financial products linked to risky mortgages before the 2008 financial crisis.
Citi said the sale of W&G has been difficult to execute and has impeded the lender’s ability to restart dividends.
The broker, however, warned that RBS could continue to be constrained from paying a dividend until a portion of is SME customers switch to the eligible challenger banks.
“…the long-term impact of the revised remedies being proposed is unclear, as there is no indication of the number of RBS’ SME customers that are expected to switch to the eligible challenger banks,” Citi said.
There is also no detail on whether RBS will be prevented from paying a dividend under the new proposals. Citi added.
Citi Research has estimated the W&G business accounts for 10% of the group's 2017 earnings.
"This would no longer need to be divested under the new proposals, a clear positive," Citi said.
Deutsche Bank believes the proposal is an “important turning point” for RBS. The Williams & Glyn sale has cost shareholders about £1.8bn since it was announced in 2009.
“The proposed solution is not only earnings per share accretive, but should also make RBS’s strategic targets easier (W&G produces a high-teens return on equity, sub-50% cost/income ratio), and likely brings forward the resumption of dividends this time next year with larger capital returns beyond that,” the bank said.
Meanwhile, JP Morgan said the new state aid proposal could end the uncertainty surrounding Williams & Glyn.
"We see the new proposal as helpful for RBS but potentially disappointing for banks which might have benefitted from a forced sale of Williams & Glyn," JP Morgan said.
Jefferies the proposal could clear a potential hurdle to the return of any excess capital, though it adds operational complexity and the life of the SME fund arrangements is unknown. However, it looks better for the eligible challenger banks than for RBS at first glance, the broker said.
RBS releases its annual results on Friday and is expected to report losses of £6.1bn along with further job cuts.