News breaks after the markets have closed on Friday (always a bad sign) that the Project Rainbow deal – being the RBS sale to Santander of 20% of its branches, has collapsed. The main reasons given are that the IT infrastructure was not going to be transferred in time for February 2013 and that the Spaniard’s patience with a deal whose heads of terms were signed in March 2010 had run out.
There are other reasons no doubt behind this too. Santander is after all a Spanish business and I can’t imagine the Spanish regulators are very happy about seeing precious capital get allocated to a non-Spanish institution. Santander UK has also postponed its IPO indefinitely in an additional sign of trouble for the bank.
For RBS, this is a much bigger headache though. Under EU regulations concerning state aid it has to divest itself of the bank by Feb 2013. This just can’t happen now. There may be no real chance of finding another buyer in short order and in any event, such a small bank is of little use to anyone except perhaps Co-Op and they already have a similar challenge trying to buy a business off Lloyds. This leaves the IPO route, but again, a small bank like this is hardly a tasty morsel for the worst IPO markets in decades.
All this means then that the price action on RBS is going to look pretty bad on Monday. The £1.3 billion is a decent chunk of the equity in the bank and you would expect that 3% of potential equity is gone, which was the sale price. In reality, the markets will not take that so easily is my view. RBS has had a good run in the last couple of weeks as bank liquidity has eased up it has gained nearly 40p on its price – after this news it will be a real struggle to stay above 220p by the end of next week in my opinion.
Another interesting element is the effect on Lloyds Banking Group, its Project Verde deal to sell branches to the Co-op will have many of the same challenges – can that be completed? This will also likely weigh on the Lloyds shareprice too which has risen to 38p in the last week. Again, expect this to give up recent gains and head back below 35p next week.
Banks used to be boring, will they ever be again?
Cityunslicker