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View the article online at http://citywire.co.uk/wealth-manager/article/a753551

Is RBS Citizens IPO a stateside Royal Mail opportunity?

by Robert St George on May 30, 2014 at 10:53

On the other hand, in the calendar year 2013 Citizens posted a net loss of $3.4 billion (£2 billion) – although that was due to a one-off goodwill impairment charge of $4.4 billion (£2.6 billion), which it attributed to the sluggish US economy. Excluding that, the bank’s full-year return on equity was 4.95%, up from 4.86% in 2012. Its net interest margin of 2.85% lags the peer group average of more than 3%.

Ian Gordon, head of banks research at Investec, is not impressed by those numbers and is therefore not enthused about Citizens as a long-term investment.

‘It is not a new company, so we have clear visibility of the weak operating story,’ he stated. ‘In simple terms we are talking about a bank with a cost-income ratio of around 70% and a return on equity in the low single digits, and no obvious transformation of those metrics.’

Gordon therefore regards it as unlikely that the IPO will represent a bargain opportunity. ‘There is no obvious reason from the outside why it should be materially mispriced.’ He would not be drawn on the possibility that there are subtle reasons from the inside for any mispricing, such as those alluded to by Hahn.

Pau Morilla-Giner, chief investment officer at London & Capital, sits somewhere between them. He does expect Citizens to be listed cheaply. ‘There is a high likelihood that RBS will have to take a discount in terms of valuation. Why? RBS has notoriously failed to find a suitable strategic buyer, which was the preferred option. This sends a powerful message to the market.’

But equally Morilla-Giner believes that the discount will be justified. ‘Expect downward pressure to Citizens even after the IPO is over,’ he warned. ‘We would not rush in.’

Morilla-Giner is sceptical for the longer term too. 'It is clear to us how difficult it is for large regionals like Citizens to find a comparative advantage versus smaller players or larger banks.

'Banks like Citizens rely on traditional deposit taking and loan origination to make money, and the low interest rates that have prevailed since the financial crisis have cut into their profits. Midsize banks either have to make risky loans that other banks wouldn’t or underprice their loans to attract businesses from other banks. None of these are attractive to investors in the current market climate.'

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