[ by Melanie Gretchen ]

Royal Bank of Scotland has begun the process of distancing itself from the British government, which owns 81% of  the bank.  Such a move would be welcomed by bank management - led by CEO Stephen Hester - as well as British taxpayers.  The bank has been operating as a "ward of the state" since 2008, when the government rescued the crippled  financial institution with significant bailouts.  The government did the same for Lloyds Bank, which remains under government control, as well.

The bank recently reported a Q1 profit of £393 million ($611 million), its first plus-quarter since 2011.  For the same period in 2012, RBS reported a loss of £1.5 billion ($2.3 billion).  The improvement in 2013 was greatly facilitated by a series of cost cuts a slashing of assets, and a reduced exposure to risky trade positions.  Fact is, the RBS results for the quarter ended 3/31/13 surpassed analysts' estimates. 

The Edinburgh-based bank also continued to reduce its investment banking division, and was able to provide for a smaller reserve allowance for delinquent loans.  The bank further benefited from a £249 million one-off gain on the value of its own debt.  Finally, a 28% reduction in overall operations to £826 million, or $1.3 billion, boosted quarterly results. 

Earlier Announcements by RBS.   Before releasing its results for Q1 of 2013, RBS mad the following announcements: 

• it will sell a stake in Citizens Financial Group, the American lender that the bank bought in 1988; 
• it listed part of its British branch network; and,
• it sold shares in its local insurance unit, Direct Line. 

Completion of the overhaul is expected by next year, which would enable the British government to begin reducing its holdings in the bank.  According to RBS Chairman Phillip Hampton:  "What we want to do is have a business that’s performing well for its customers so we can write a prospectus with the government enabling the government to start selling shares from the middle of 2014.  It could be earlier, that’s a matter for the government."

CEO Stephen Hester added that, although the average share price was above the government’s 407 pence-a-share break even point, the initial price of the shares may be below what the British government paid for them in 2008.  Therefore, the process of privatization, coupled with the slow economy, will take somewhat longer than bank management had initially hoped.not be a short one. 

Mr. Hester said:  “Because of the size of the state shareholding in R.B.S. and Lloyds, selling these shares will take a number of years.  There’s no momentum in the profits until the economy recovers."

For further details, go to [Dealbook, 5/3/13].