The government has cut its stake in Lloyds Banking Group plc (LON:LLOY) to below 3% but efforts to offload its 73% ownership in Royal Bank of Scotland Group (LON:RBS) have stalled as it continues to tackle legacy issues.
Lloyds has edged closer towards full private ownership after UK Financial Investments, which manages the holding in the bank, reduced its stake by about 1% to 2.95%.
The latest divestment means £19.5bn has been returned to the taxpayer, compared to the £20.3bn the government threw at the bank to save it from the brink of collapse during the financial crisis in 2008.
The decision to reduce the stake further comes after the bank reported its highest full year pre-tax profit in a decade last month. It posted a 2016 statutory pre-tax profit of £4.2bn, more than double the £1.6bn recorded a year earlier, as payment protection insurance provisions (PPI) were slashed.
In contrast, Royal Bank of Scotland last month reported a staggering 2016 loss of £6.95bn, compared to a loss of £1.97bn in 2015, reflecting litigation and restructuring costs. The continued problems at the bank mean the government has shelved plans to sell down its shares.
So where did RBS go wrong and how has Lloyds managed to rise from the ashes?
Where the problems began for RBS...
During the financial crisis, the government in November 2008 purchased an initial stake of 58% in RBS for £15bn as part of a capital raising following the lender’s ill-judged takeover of Dutch bank ABN Amro the same year.
In January 2009, the government raised its stake in the troubled lender to 68% after the bank warned of annual losses due to the write down of its acquisition of Amro.
Later the same year the government launched another rescue plan, increasing its stake in the company, after the bank reported a loss of £24.1bn for 2008 – the biggest in British corporate history at the time.
The government started to wind down its shares in RBS in 2015, selling 5.4% of its shares in the bank and raising £2.1bn, a third below the price it paid. The sale cut the government's stake in RBS to 73%.
However, plans to sell down a further stake were put on hold in 2016 following June’s Brexit vote. The lender's eye-watering 2016 loss didn’t help matters either.
RBS restructuring...
RBS has slashed about 90,000 jobs since 2008 when the bank had operations in 54 countries.
Under the conditions of its bailout, the European Commission has forced the bank to sell off assets including commodity broker Sempra, insurer Direct Line, US bank Citizens and money transmission business Worldpay.
The Commission also ordered RBS to sell 300 of its UK Williams & Glyn branches. However, after struggling to sell the branches, RBS in February said it had shelved the plans and has proposed setting up a fund for challenger banks. The proposal has been put to the Commission.
RBS CEOs thrown out...
Stephen Hester was forced to step down as chief executive of RBS in 2013 to allow the sale of the government’s stake.
George Osborne, the Chancellor at the time, indicated that he wanted to return the government’s stake to private hands by the end of 2014 but reportedly wanted another chief executive to lead the process.
Hester joined RBS as its boss in 2008, replacing Fred Goodwin after the takeover of ABN Amro put the bank on its knees. Goodwin was stripped of his knighthood as a result of the lender’s collapse.
RBS named Ross McEwan, the former boss of Commonwealth Bank of Australia, as its chief executive in 2014. McEwan has remained at the bank since.
RBS bad loans...
Commercial lender Ulster Bank was considered a major source of bad loans at parent company RBS.
The bad loans peaked at £1.4bn in 2009 but continued to weigh on the bank’s profits into 2014.
The US Citizens bank also attributed to the bad loans along with losses on loans for UK mortgages, credit cards and companies.
Legacy issues...
In the bank’s full year results last month, RBS said its 2016 loss was in part due to litigation and conduct costs of £5.86bn.
The legacy issues included the bank’s US litigation over the way it packaged and sold mortgage backed securities. RBS took a further £3.1bn provision in its results to cover an expected US fine of about US$10bn.
Fines and legal costs have amounted to £15bn since 2011 when RBS started setting aside provisions to compensate customers for mis-sold PPI.
In 2013, RBS was also fined £390mln for a Libor rigging scandal and £800mln for manipulating foreign exchange markets.
Subject to clearing its legacy issues, RBS expects to return to profit in 2018 as it targets £750mln of cost savings this year.
Lloyds bailout...
The government bought a 43.4% stake in Lloyds in October 2008 after the bank’s profits were hit by the credit crunch.
Earlier that year Lloyds TSB had stepped in to rescue HBOS, which owns Halifax, for £12bn after its share price halved in the first hour of trading.
The takeover of HBOS came shortly after the demise of the Lehman Brothers - the fourth-largest investment bank in the US before declaring bankruptcy in 2008 - which is thought to have played a major role in the unfolding of the global financial crisis.
Management switch up...
Lloyds chairman Sir Victor Blank was forced to step down in May 2009, shortly after the bank revealed £11bn of losses at HBOS.
In November the same year, the government piled in another £5.7bn into Lloyds to maintain its stake at 43% after a rights issue.
In 2010 chief executive Eric Daniels surprised the city by deciding to step down. Subsequently, the bank poached Santander’s UK head Antonio Horta-Osorio, who took over in early 2011 and has remained at Lloyds ever since.
It wasn’t long after joining Lloyds that the bank’s troubles took a toll on Horta-Osorio. The chief executive in late 2011 decided to take three months of stress leave.
Lloyds recovers..
In 2010 Lloyds returned to a profit for the first time since the banking crisis after bad debt charges slowed and costs were cut as it continued to merge the HBOS business with its Lloyds TSB operation.
The return to profit in the first three months of the year came earlier than expected.
Once the government was convinced Lloyds had started to turn the business around, it announced it would start selling its stake in the bank. It sold 6% of its share in the group in late 2013.
As Lloyds continued to show further recovery, the government wound down its stake further at a gradual pace and now owns just under 3%.
PPI issues remain...
While Lloyds seems to have turned over a new leaf, particularly after a strong 2016 performance, it still has PPI issues hanging over its head.
Last Friday Lloyds said it has set aside a further £350mln to cover claims for mis-sold PPI after the financial regulator moved its deadline for new complaints.
The Financial Conduct Authority last week announced it was moving its cut-off date for new PPI complaints to August 2019 from a previous deadline of June 2019.
The further provision Lloyds has put aside to cover the extra two months will be included in the lender’s first quarter results.
The bank’s announcement came just over two weeks after Lloyds reported impressive full-year profit as it cut PPI provisions to £1.0mln from £4.0mln.
Brexit...
Horta-Osorio cautioned at the presentation of Lloyds' full year results that its performance was closely tied with the UK economy, where 97% of its business is focused.
Wilson King Investment Management’s head of research, Richard Hunter, said investors need to be wary of the bank's exposure to the UK economy amid uncertainties surrounding Brexit. “It sounds like it’s going to be a fairly messy divorce,” he said on the UK’s exit from the European Union.
The government plans to trigger Article 50, the two-year process for the UK's withdrawl from the EU, by the end of March.
Still, Lloyds believes its strong capital position puts it in good stead to withstand any headwinds. The common tier 1 equity ratio rose to 12.4% in 2016 from 11.4% in 2015.