In a manner that has become familiar, recent results from two of the banks part-owned by the UK taxpayer, Lloyds and the Royal Bank of Scotland, were received with ill-informed ire. The press fulminated at bonuses awarded to RBS staff despite the vast losses announced by the firm, while unions greeted Lloyds's £2.2bn profits with dismay. In reality, the Lloyds results weren't nearly as good as the quoted figure suggests. Meanwhile, RBS seems at last to be gaining traction in the turnaround that its chief executive, Stephen Hester, is overseeing. The Qatar Investment Authority, whose assets are estimated to exceed $65bn (£40bn), has expressed an interest in buying a stake in both banks. With this news, the question of when and how the UK government will sell down its holdings is again under the spotlight.
The Treasury has made it clear that it wishes to turn a profit on the £65.8bn it invested in the two banks. RBS is trading at roughly 10 per cent less than the 50p share price paid by the government for its stake, while Lloyds shares are down more than 15 per cent on the 74p purchase price. This gives the taxpayer a loss of almost £6bn on the investments at current market levels. Would the Qataris pay more to bolster their alreadyimpressive portfolio of European banks?
Back to basics
RBS bankers, in particular, are keen to escape state ownership; many of them feel it has hindered their ability to compete with rivals such as Barclays, which turned to the Qatar Investment Authority rather than the government for support during the financial crisis. RBS, which is 83 per cent owned by the taxpayer, may be turning the corner in its core banking operations, but it still faces numerous challenges as Hester's team attempts to take what was once the world's fifth-largest bank back to profitability.
Its loss for 2010 was £1.1bn - far better than the £3.6bn lost a year earlier, but still an ugly headline number for a bank that is looking to court investors. As with Lloyds, the bulk of the losses came in "non-core" business lines - the peripheral investments that the bank undertook at the height of the boom, when it was trying to compete with Goldman Sachs, Santander and Barclays. These range from aircraft leasing to proprietary trading to a number of marginal overseas operations, corners of the Fred Goodwin empire that is now in tatters.
The big difference in RBS's results is that it posted an operating profit of £2bn for 2010; the previous year, it reported an operating loss of £6bn. The bank's chairman, Philip Hampton, described this as a "step change", a claim validated by the £7.4bn operating profit in the "core" businesses - the day-to-day retail, corporate and investment banking units. The drop in investment banking income (down 30 per cent from 2009) and rise in corporate and retail profits (up 65 per cent) are a sign that RBS is returning to what made it great in the first place - old-fashioned high-street and business banking.
Lloyds, whose CEO Eric Daniels passed control to the Santander executive António Horta-Osório as the results were released, is behind its Scottish rival on the road to recovery. Horta-Osório will no doubt have to spend his first weeks in the job further dampening already lowered expectations. The feeling in the City is that Daniels didn't push back hard enough when the Labour government forced the bank to merge with its rival HBOS, though in his valedictory address to shareholders he insisted that the merger would turn out to be a "very good deal". In reality, it was a disaster and Lloyds is still facing huge write-offs from the HBOS operations in Ireland and Australia. Although the bottom-line profit looked good, Horta-Osório was swift to point out that margins would be squeezed over the coming years.
Touting for business
Perhaps David Cameron thought it would seem insensitive to raise the share sale with the Qataris on his recent tour of the Middle East, given the rather more pressing matter of the revolts in the region. Downing Street officials have been anxious to point out that it was Qatar's ruler, Sheikh Hamad Bin Khalifa al-Thani, who spoke of his enthusiasm for taking the shares off the Treasury's hands. But UK Financial Investments Ltd, set up to manage the government's shares in the banks, is quietly laying the foundations for a sale.
Lloyds and RBS bankers have been touring the Middle and Far East, presenting to sovereign wealth funds in the run-up to an official share placement. Some RBS bankers think that the first tranche could be sold this year and the Qataris, with large stakes in Barclays and Credit Suisse, would be obvious buyers.
But all of this obscures a crucial issue. The Independent Commission on Banking, chaired by John Vickers, is due to report to George Osborne in September. If it is as independent as its name suggests, then the government can have no idea of its likely recommendations. Yet its findings will have a marked impact on the valuation of RBS and Lloyds. If the banks are left more or less intact, a valuation at or above the Treasury's purchase price would not be out of the question, particularly for RBS. If the commission advises a break-up of the banks or a separation of retail from investment banking operations, share prices would likely tumble.
So, do Cameron and Osborne already know what Vickers will recommend? Or have they decided that turning a profit on the taxpayers' investments is more important than reforming the banking system? In which case, have they decided to press on with the sale regardless of what Vickers advises?
Alex Preston's novel "This Bleeding City" is published by Faber & Faber (£7.99)