RBS has called a General Meeting for 6th February to consider a Special Resolution giving the group the authority to make off-market purchases of up to 4.99% of the outstanding shares from HM Treasury. In effect this is an authority to effect a capital reduction, which will partially reduce the overhang of government held shares.
The timing is pretty poor, coming just three months prior to the AGM and without the benefit of full year financial reports. But it seems to signal an imminent placement of shares by HM Treasury, and the timing of these events may not have been within the control of the board.
Does the group have sufficient regulatory capital to warrant a buy-back? RBS showed a 13.4% Core Tier 1 ratio at FYE 2016, 15.9% at FYE 2017 and a healthy 16.7% in Q3 2018. There has been a lot of progress in reducing risk weighted assets over the period, and there is no reason to expect that trend to have faltered in Q4 2018. If exercised in full, the buyback would bring Core Tier 1 back to around 15.9%. So yes, the group does seem to be in a position to do this.
From an existing shareholder’s perspective the effects of any repurchase by the company will be to reduce the overhang of government held shares, increase existing shareholders’ participation in future dividend payments and increase existing shareholders’ voting rights. The current share price is around 0.6x book, and the effect of a buyback is antidilutive.
ShareSoc doesn’t support share buybacks, which tend to be manipulative, poorly timed and of questionable value to shareholders. But this writer is of the view that this particular initiative is shareholder positive.
Of course, private discussions and agreements between a company and its majority shareholder are generally contrary to good governance practice. This initiative would have been far better handled with the assistance of a shareholder committee.
Mark Northway, Chairman ShareSoc
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