Citizens, freed of RBS by $3.5B IPO, works to boost returns

NEW YORK – Royal Bank of Scotland PLC is selling shares of its U.S. subsidiary, freeing the unit from the shadow of Britain’s largest state-owned lender and allowing it to compete with American regional banks.

The initial public offering of Citizens Financial Group Inc. could raise as much as $3.5 billion for Edinburgh-based RBS when it prices today. The deal, the largest U.S. bank IPO since Goldman Sachs Group Inc. went public in 1999, gives Citizens independence to improve profits that have trailed its peers.

“Citizens has some catching up to do compared to other U.S. regional banks,” said Dan Werner, an analyst at Morningstar Inc. “It will help Citizens to detach from RBS, which has been focused on dealing with its own issues on the other side of the pond.”

The IPO will also free RBS of unwanted assets as it adjusts to stiffer capital rules and seeks to recover funds after receiving the biggest bank bailout in history. The lender has scaled back its investment-banking operations globally and shed branches and cut jobs in the U.S.

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RBS shares surged 2.5 percent on Sept. 19 to 366 pence in London trading, extending its weekly gain to 4.7 percent, after Scotland voted to stay in the U.K. The bank had said it would have moved to England if Scottish citizens voted for independence. RBS fell 1.8 percent yesterday to 359.6 pence.

Citizens, based in Providence, Rhode Island, is valued at a discount to other U.S. regional banks as Chief Executive Officer Bruce Van Saun seeks to double the return on equity — a measure of how well management reinvests earnings — over the next two to three years.

Citizens’ returns

ROE was 5 percent last year, compared with 10.7 percent at PNC Financial Services Group Inc. and 13.4 percent at Fifth Third Bancorp, according to data compiled by Bloomberg.

At the high end of the range, Citizens would be valued at 1.07 times net tangible book. That compares with an average of 1.91 times for U.S. banks with a market value of more than $1 billion, data compiled by Bloomberg show.

RBS is offering 140 million shares, or about 25 percent of the unit, for $23 to $25, giving Citizens a market value of as much as $14 billion. The IPO could be the largest by any financial services-company in the U.S. since Visa Inc. raised $19.7 billion in 2008.

RBS CEO Ross McEwan, who created a “bad bank” last year to house the riskiest assets, is focusing on the U.K. consumer and business unit, and seeking to boost capital levels to comply with new regulations.

Capital ratio

Spinning off Citizens will allow RBS to lose enough risk- weighted assets increase its capital ratio by 2 percentage points, according to Chris Wheeler, a London-based analyst at Mediobanca SpA.

“That’s the key thing — forget what they may make by selling this for any kind of gain,” Wheeler said in a phone interview. “It’s a matter of the continued cleanup and retrenchment of one of the biggest banks in the U.K.”

Once Citizens breaks free from RBS, it can continue to expand in commercial banking. Citizens plans to add jobs and new specialties in industries including health care and technology. The firm, which was acquired by RBS in 1988 and traces its history to 1828, has $130.3 billion in assets and about 1,230 branches in 11 U.S. states.

Net revenue at Citizens rose to $1.47 billion in the second quarter from $1.17 billion in the prior three months. The bank’s efficiency ratio, a gauge of management’s ability to control costs, fell to 64.4 percent from 69.5 percent during that time, according to data compiled by Bloomberg.

Bank profits

Citizens, which will list on the New York Stock Exchange under the symbol CFG, becomes a public company as record-low interest rates put pressure on bank profits. The KBW Bank Index has increased 5.6 percent this year.

While higher rates can help boost profits by allowing banks to make more money on loans, it can also hurt earnings if borrowing costs rise before the loan yields increase. That’s prompted investors to play a guessing game over when the Federal Reserve will increase rates and how soon that may help U.S. bank profits.

“It’s been a near-schizophrenic market for bank investing,” said Terry McEvoy, an analyst at Sterne Agee & Leach Inc. “On any given week it could work to your advantage or disadvantage depending on where sentiment is with regards to today’s near-term outlook for interest rates.”

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