Back in July, ace City investor Neil Woodford, who famously sold out of banks before the financial crisis, categorically denied claims by the Daily Mail that he was eyeing up an investment in Lloyds Banking, saying:
“I have absolutely no intention of buying a stake in Lloyds or any other UK-focused high street bank at the present time and don’t expect to do so for some time”.
Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US), the 81%-taxpayer-owned bank, certainly falls under Woodford’s description.
Woodford’s concerns about these banks centred on the risk of future capital raisings and the extent of further impairments of assets. His view was that the process of loss recognition for bad loans “still has several years to run”.
Woodford’s pessimism contrasted with the optimism at the time coming from both the bank and government. RBS’s chairman, Sir Philip Hampton, had recently said the company’s recovery would be “substantially complete” by the middle of 2014. Prime Minister David Cameron had spoken of selling the taxpayers’ stake “as soon as possible”; and it was widely believed that both the prime minister and Chancellor George Osborne would like to have the whole business done and dusted before a 2015 general election.
Was Woodford wrong to be so pessimistic? And might the newsflow over the months since have led him to change his view on RBS? The short answer on both counts is: “No”.
On 10 August — less than a month after Woodford delivered his withering words, and a week after RBS released its half-year results — Business Secretary Vince Cable said in an interview with the Sunday Telegraph:
“I think it is pretty unrealistic to think of RBS going back into private ownership this Parliament or probably within five years”.
Jumping to the bank’s third-quarter results announcement on 1 November, George Osborne was downbeat on the prospects of a sale in the foreseeable future: “I think, sadly, it is still some way off,” he told BBC Radio 4’s Today programme. “I think, quite frankly, it is unlikely before the general election”.
RBS told us within a Q3 statement that it is creating an internal ‘bad bank’ of high-risk assets, which will result in increased impairments in Q4 and a “substantial loss” for the full year. Management also told us that “in light of a changing regulatory landscape and other capital headwinds” it would be targeting a capital buffer ratio 3% higher than the current 9% level by the end of 2016.
Unwinding impairments and capital headwinds are precisely the things that concerned Woodford back in July, and I have to say that RBS looks the least-likely FTSE 100 bank through which he might make a return to the long-shunned sector.