Citizens Bank’s future cloudy as spin-off announcement loomsFebruary 27th, 2013 at 8:04 pm by Ted Nesi under Nesi's Notes, On the Main Site
The Royal Bank of Scotland, which bought Citizens in 1988, is expected to unveil plans to sell 15% to 25% of its stake in the local bank through an initial public offering (IPO). It would be yet another move by CEO Stephen Hester to shore up RBS, which is majority owned by British taxpayers after the U.K. government spent $68.9 billion bailing it out in 2008-09.
What does all this mean for Citizens and its presence in Providence? In the short term, probably not much. Over the long term, it likely depends on whether Citizens gets eaten by a bigger bank – and how much of the bank’s operations are still here in the first place.
The reasons RBS is planning the IPO – quite possibly despite CEO Hester’s reservations – are clear enough.
RBS has been under heavy pressure to sell Citizens from British regulators and Prime Minister David Cameron, who want the bank to slim down into a simpler organization and increase its assets inside the U.K. The prime minister, who faces a tough re-election race in 2015, also wants to show voters his government is making progress in unwinding the unpopular bank bailouts.
Selling a minority ownership stake in Citizens to the public, as RBS is expected to say it will do within two years, would leave the local bank as an independent entity controlled by the Scottish lender. But the move is widely seen as a bid by Hester to stall for time as he fends off political pressure to sell quickly.
Why doesn’t Hester want to sell? For one thing, jettisoning Citizens would be a vivid sign of the British bank’s diminished post-crisis ambitions – it’s often called the “jewel in the crown” at RBS. “It was cherished by the former management and seen as a platform for further expansion in America that could have seen RBS spread across to the U.S. West Coast,” Scotsman columnist Terry Murden writes. “But that was before the crash.”
More pragmatically, Citizens has been underperforming its peers in recent years, which means it might fetch less than its book value of roughly $13 billion.
“Within two years Citizens’ [return on equity] will have built quite well and should be enough to justify a premium to book value,” one London analyst told The Deal. “This could be an elegant solution that marries management expectations on valuations and potentially fixes government concerns over a potential capital shortfall at RBS.”
Most analysts see the Citizens IPO as a strategic detour before some eventual deal where a buyer purchases the entire Providence bank, though theoretically it could be more permanent (or a healthier RBS could someday buy the IPO stake back). Most of the discussion focuses on one potential suitor: TD Bank, which reportedly has had informal talks with RBS about Citizens. Others – including U.S. Bancorp, PNC, Brazil’s Itau or a private equity firm – have also been mentioned.
“Citizens is large and in pretty attractive markets, so everyone has been waiting for it,” one investment banker told The Wall Street Journal. However, it’s unclear that Washington would back a major merger.
“Public policy is discouraging big banks from getting bigger,” Jeff K. Davis, managing director of Mercer Capital’s financial institutions group, told American Banker, adding: “It could be a nonstarter from a regulatory standpoint in this country right now.” That leaves open the remote possibility of Citizens getting split into pieces and sold to multiple buyers.
For Rhode Island, there are a number of key questions about what happens to Citizens. What will be the impact on local customers? Will the bank cut jobs? And how will it change Citizens’ presence as a corporate citizen?
The customers have the least to worry about – they’re the reason anyone wants to buy the bank in the first place, and any new owner of Citizens (or what used to be Citizens) would bend over backwards to make sure they keep their deposits and mortgages with the new institution.
For Citizens employees, the outlook is murkier. The bank had nearly 5,000 workers in Rhode Island as of 2011, according to EDC figures. Employees who work in branches and serve customers directly are likely to be kept in place, for the reasons mentioned in the previous paragraph. But a new owner will want to cut costs by getting rid of any back-office or corporate functions that are no longer necessary if they’re duplicated in, say, Toronto. That said, the status quo has its own risks: RBS has made no secret it wants Citizens to get more profitable.
That leads to the third question, about Citizens’ corporate presence in Rhode Island – or lack thereof.
The bank’s community involvement isn’t seen as what it used to be; though the bank is nominally headquartered in Providence, CEO Ellen Alemany’s main office is actually in Stamford, Conn., and her predecessor Lawrence Fish’s was in Boston. How many of the bank’s better positions are still in Providence? And how many of its other functions – and jobs – are in the state? A sale doesn’t have to mean mass layoffs: a buyer could discover reasons to keep those operations where they are now.
Of course, all of this is pure speculation about events that may not even come to pass. But as RBS continues to wrestle with Citizens’ future, Rhode Island leaders should keep a close eye on the developments.
• Related: Full coverage of a possible Citizens Financial Group sale (since August)