State-backed Royal Bank of Scotland has agreed to pay £1.5bn to the British taxpayer in a complex deal ultimately enabling it to resume future dividend payouts and which it hopes will accelerate its tortuous return to the private sector.
The embattled lender, 80% owned by the UK Treasury, hopes that the agreement will help pump its shares back up towards the price that will enable the British government to break even on its £45 billion rescue at the height of the financial crisis.
RBS has been crippled by the cost of setting up a bad bank for its toxic assets and charges relating to historic misconduct, and reported an £8.2bn annual loss earlier this year, so is unlikely to start paying dividends any time soon.
But it still feels hampered by a condition set out in its rescue agreement with the Treasury effectively blocking the bank from making payouts to ordinary shareholders while the British government holds its stake.
It has now agreed that it will pay £320m this year, followed by a further £1.18bn, to enable it to exit the arrangement.
Any portion left unpaid by the start of 2016 will be subject to 5% annual interest, or 10% if it is not paid by 2021.
The bank said it believed the deal would over time “increase the appeal of RBS’s ordinary shares to a wider range of equity investors and may expedite the timeline for HMT to start reducing its shareholding in RBS”.
Its argument is that the prospect of receiving a dividend even before the British government returns its stake to the private sector will make shares more attractive and pump the price up.
This would help the stock more quickly achieve the “break even” value, commonly cited as 500p, which it would need to reach for the Treasury to sell its stake at what is seen as a fair value to the taxpayer. Shares are currently 309.8p.
Chief executive Ross McEwan said: “Today’s agreement is a vote of confidence in the progress we have made in rebuilding RBS and in our plan for the bank’s future.”
Chancellor George Osborne said: “This is another important step on the road to a more resilient banking system and in dealing with the problems of the past to get the taxpayer’s money back.”
Details of the agreement were announced after it was formally approved by the European Commission under EU rules on state aid.
The EC also agreed to extend the deadline for its sale of 315 branches – which RBS had originally been ordered to do by the end of last year, but was delayed after it failed to complete a sale to Santander.
The European authorities said they recognised the “commitment” to spin off the sites as a standalone bank, which will be known as Williams & Glyn.
A stock market float of the new business must take place by the end of 2016 and within a year RBS will need to have disposed of its whole interest in it.