Shares in Royal Bank of Scotland Group plc (LON:RBS) gained today after confirming it plans to scrap its sale of 300 Williams & Glyn branches and instead set up a fund to help smaller challenger banks.
The bank wants to provide £750mln to finance competition in business banking rather than selling the branches, RBS announced late on Friday.
RBS released another statement today, confirming its decision to ditch the sale of the branches, which is reportedly expected to receive approval by the European Commission within weeks.
The 72%-state owned bank said it has already taken a £750mln provision within its 2016 results due to the new proposal. RBS added that it is likely to absorb restructuring charges in 2017 and 2018 by reintegrating Williams & Glyn.
The Commission had required RBS to sell the branches as a condition of its 2008 state bailout.
Chancellor Philip Hammond said last year the government would not sell more of its stake until Williams & Glyn had been sold and the bank had reached its settlement with the US Department of Justice over the sale of financial products linked to risky mortgages before the 2008 financial crisis.
“Today's proposal would provide a path to increased competition in the small and medium enterprises (SMEs) market place,” RBS chief executive Ross McEwan said in Monday’s statement.
“If agreed it would deliver an outcome on our European Commission State Aid divestment obligations more quickly and with more certainty than undertaking a difficult and complex sale and would provide much needed certainty for customers and staff."
The European Commission’s Margrethe Vestager will ask the body to evaluate the proposal in the coming weeks.
Citi Research has estimated the Williams & Glyn 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 in a note to investors.
"However 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."
The broker also warned that RBS could be constrained from paying a dividend until a portion of is SME customers switch to the eligible challenger banks. Under previous proposals, RBS was only able to pay a dividend until an exit from Williams & Glyn was assured. There is no detail on whether RBS will be prevented from paying a dividend under the new proposals, Citi said.
Citi reiterated a 'sell' rating and a target price of 170p.
"W&G has been difficult to execute and has impeded RBS’ ability to restart dividends.
"Any change in the state aid obligations is therefore likely to be well received, however we would caution that: (i) the European Commission still needs to agree to the Her Majesty's Treasury proposals, (ii) the devil will be in the detail on the construct of any fund and the required switching amount."
JP Morgan raised its target price to 210p from 185p and reiterated an 'under weight' rating on the stock, saying the new state aid proposal could end the uncertainty surrounding Williams & Glyn but the shares are expensive. It lifted its earnings per share estimate for fiscal 2019 by 12% due to the re-consolidation of the business but expects a 100 basis point hit to the tier 1 capital ratio on the bank of costs and risk-weighted assets.
"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.
RBS releases its annual results on Friday and is expected to report losses of £6.1bn, which would be one of the group’s biggest since its bailout. The lender recently revealed it had set aside a further £3.8bn ahead of an expected fine from US authorities.
Shares in RBS jumped 4.72% to 253.80p in morning trade.
-- Adds broker notes, update share price --