A Citizens Financial Sale Would Face High Hurdle in Regulators

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A handful of banks might be interested in buying all of Royal Bank of Scotland's U.S. operations, but a deal that size is likely a long shot.

RBS is expected this week to unveil a plan to sell 20% to 25% of its Citizens Financial Group in Providence, R.I., to the public within two years.

Since British news organizations such as The Guardian and the Telegraph reported the potential initial public offering on Friday, names like PNC Financial Services Group (PNC), Toronto-Dominion Bank (TD) and U.S. Bancorp (USB) have surfaced as parties that could seek to buy the $132 billion-asset Citizens outright.

Not so fast, say observers who follow the large banks. No offense to Citizens and its more than 1,400 branches stretching from the Midwest to the Northeast, but a deal that size would be a tough slog and those banks might not be that interested for other business reasons.

"Public policy is discouraging big banks from getting bigger," says Jeff K. Davis, managing director of the financial institutions group at Mercer Capital.

"There is a pool of logical buyers, but think of the Capital One deal with ING — it's not like that was the second coming of JPMorgan, and that deal barely squeaked through," says Davis, a former sell-side analyst. "It could be a non-starter from a regulatory standpoint in this country right now."

The three prospective suitors are among the ten largest banking organizations in the United States in terms of assets. Toronto-Dominion in Montreal (No. 9), PNC (No. 6) in Pittsburgh and U.S. Bancorp (No. 5) in Minneapolis range in assets from $200 billion to $353 billion.

Representatives from PNC, U.S. Bancorp and RBS declined to comment on the record. TD did not return a call for comment. Of course, that list of potential suitors is not exclusive; less obvious players could make a go at it, as could some other international banks looking for an entrée to the U.S. market.

Besides the regulatory environment, PNC and U.S. Bancorp flatly might not be interested, analysts of the companies say.

Citizens' branch network is decidedly skewed toward the Northeast and Mid-Atlantic, markets where U.S. Bancorp doesn't have much of an existing presence. Yet U.S. Bancorp executives have seemed content to do without them.

Chief Financial Officer "Andy Cecere has said that the growing in the Northeast is not as likely as other markets," says R. Scott Siefers, an analyst at Sandler O'Neill.

Meanwhile, PNC's CEO-in-waiting, Bill Demchak, has downplayed the idea of the Pittsburgh bank as a buyer anytime soon.

Demchak — who is president, and is slated to succeed CEO Jim Rohr in April — said last week that PNC's No. 1 priority is capitalizing on its recent acquisition of Royal Bank of Canada's U.S. retail operations in the Southeast and its 2009 purchase of National City in Cleveland, which also had a presence in the Southeast.

"As a company we're fairly well situated," Demchak told American Banker last week. "We're small enough that we're not one of the big megabanks that has everybody worried, and we did well during the last financial crisis."

His comments echoed similar remarks by Rohr about being organic-growth minded.

"It is feasible to think of PNC as a buyer at least on paper" because it has done large acquisitions, "but the real emphasis is utilizing the Southeast platform," says Terry McEvoy, an analyst at Oppenheimer.

Less is known about Toronto-Dominion's leanings. It held informal talks to buy Citizens, the New York Post reported on Aug. 3.

The potential initial public offering is a response to pressure on RBS from the Financial Services Authority, the U.K.'s banking regulator, to boost its capital ratios. The British government owns an 81% stake in RBS following its 2008 bailout.

Based on past comments by Stephen Hester, chief executive of RBS, the potential IPO of Citizens is not a maneuver to smoke out potential buyers for it, but just a pragmatic compromise with its regulators. Selling part of the company would bring in some capital, without completely divesting from the U.S., says a person with familiar the matter who asked not to be named.

"Selling Citizens today would be a little bit like selling RBS shares for the government," Hester said during the company's third-quarter conference call in November. "It would be selling an asset before it's maximized its value and before the market is profitably valuing financial assets. It wouldn't help shareholder value. It would give us obviously a nominally higher capital ratio."

The public offering of Citizens would follow a similar path the company undertook with its Direct Line insurer unit. The company took 30% of the company public in October, nearly two years after it announced it would do so.

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