By Lars Mucklejohn
Chancellor Jeremy Hunt has said it is “time to get Sid investing again” as he looks at offering remaining government-owned Natwest shares to the public.
The phrase refers to Thatcherite “Tell Sid” adverts from the 1980s encouraging Britons to buy government shares in British Gas.
So what might be in store for retail investors this time around?
The government’s stake
The government spent £46bn of taxpayers’ money to rescue Natwest Group, then called Royal Bank of Scotland Group, from collapse during the financial crisis in 2008.
It has since gradually reduced its stake in the bank from 84 per cent to around 38.7 per cent as of May.
Earlier this year – when Natwest shares changed hands for more than 300p – the Office for Budget Responsibility forecast taxpayers would lose £33bn if the bank was fully privatised at the current market price.
However, Natwest shares have sunk more than 24 per cent so far this year to around 200p. The bank’s stock registered its biggest one-day drop since Brexit after it reported weak third-quarter results at the end of October.
A “debanking” row between the bank and former Ukip leader Nigel Farage has also received widespread media attention, with Natwest’s chief executive Dame Alison Rose resigning over the scandal in July.
While Hunt yesterday reaffirmed the government’s intention to fully sell its stake in the bank by 2025-2026, the Treasury has insisted that it will not cash out for an unfair price.
Deja vu
George Osborne tried something similar with Lloyds Banking Group when he was Chancellor in 2015.
Lloyds was also rescued in the financial crisis, and by 2015 the government had reduced its stake from 43 per cent at the time of the bailout to 12 per cent.
The scheme for Lloyds would have tried to sell £2bn worth of shares to the public. The Chancellor wanted to let people apply for between £250 and £10,000 worth of shares, with a discount of at least five per cent to the market price. Applicants could also have received up to £200 worth of bonus shares if they held stock for more than a year.
However, “there was never any detail on what a share sale plan would have meant for existing shareholders”, noted Susannah Streeter, head of money and markets at Hargreaves Lansdown.
“The impact could have been a short-term sell out from retail investors to then reinvest for the bonus or discount, and this could have distorted the price. So, they would have had to consider whether the share sale should run alongside another form of rights issue, with a discount to reward holders.”
The offer was eventually cancelled in 2016, and by 2017 Lloyds had bought back all of its shares from the government. The sale process with Natwest has taken much longer as the government seeks value for taxpayers.
How attractive are Natwest’s shares?
Changing customer behaviour and a highly competitive mortgage market have hit many banks’ net interest margins – measuring the difference between what they pay out to savers and receive in interest payments – in recent months as the tailwind from the higher interest rates dies down.
“The UK banking sector has been deeply unloved for years, and shares trade at lowly valuations. That does provide some upside potential for the share price should there be a positive reappraisal of the UK economy or the stock market, but that’s already been a long time coming,” said Laith Khalaf, head of investment analysis at AJ Bell.
“Probably more enticing for investors is the prospect of a seven per cent dividend yield which will help put bums on seats when the shares come to market. This yield will likely be boosted by a discount to the market price offered by the government. If there’s no discount, investors might as well buy shares on the open market.”
Khalaf said the offering could give experienced investors the chance to “pick up a slice of a high street bank at an attractive price”, while giving a “nudge” to those who do not invest to do so for the first time.
Will Howlett, financials analyst at Quilter Cheviot, told City A.M. that markets have “overreacted” to banks’ results and Natwest’s shares should “see more stability going forward, reflecting the tailwinds from the structural hedge while asset quality is holding up”.
Streeter noted that the government had left retail investors out of previous sales.
‘’The UK banking sector has fallen out of favour as investors have been drawn by the lure of Big Tech, and while current economic pressures mean big gains in valuations are unlikely, there is opportunity for those seeking stocks delivering stable income, given they have largely offered reliable dividend yields,” she added.
RBC analyst Benjamin Toms said the broker saw “more upside potential elsewhere”, flagging the bank’s cost control in a high inflation environment and asset quality that could underperform peers in 2024.
He added: “In our view, net sentiment towards [Natwest] and its Coutts brand has not recovered post the Farage de-banking issue. However, a historical survey of other government stake sales suggests that companies share prices and valuations tend to outperform peers, over the period that governments reduce their stakes.”
A Natwest spokesperson told City A.M.: “Any decisions around share sales are a matter for the government. We welcome the government’s continued commitment to returning Natwest Group to private ownership and believe this is in the best interests of the bank and our shareholders.”
