If the British government requires Royal Bank of Scotland Group PLC to shed noncore operations after being forced to step in and take control of the ailing Edinburgh company, selling its U.S. banking arm would be easy, observers say.
Struggling to return to profitability after years of dealmaking and a mauling in the credit markets, Royal Bank managed to sell just 0.24% of an offering targeting its own shareholders last week, prompting the U.K. government to acquire a $23 billion stake, or 58% of the company.
Analysts on both sides of the Atlantic say that British regulators may require it to shed noncore assets, and that its Citizens Financial Group in Providence, R.I., would be an attractive target. At the end of the first quarter, RBS's $161 billion in U.S. assets and $97 billion in U.S. deposits were almost exact matches for those of National City Corp. Nat City since then has agreed to a sale to PNC Financial Services Group Inc.
Citizens, which Royal Bank acquired in 1988, has a network of branches that stretches from the Northeast through the Midwest and does not have the kind of overhang from troubled mortgages that Nat City did.
"[Citizens] is certainly saleable," said Robert Maneri, an analyst at KeyCorp's Victory Capital Management.
One London analyst, who asked not to be named, said: "The company needs to shrink assets, and since the [British] government is now the controlling shareholder. I think the government is much more interested in seeing RBS focus on being a U.K. company than it is in the international ambitions of RBS." Citizens would be a logical choice if foreign divestitures were required, said the analyst, who also described the unit as "salable." Royal Bank would likely wait until late next year before selling Citizens, so it could fetch a better price, the analyst said.
Under Sir Fred Goodwin, who stepped down as Royal Bank's chief executive last month and will leave the company next month, RBS was an aggressive acquirer. Along with making several U.S. deals over the years, last year it bought ABN Amro Holding NV. It now has operations in more than 50 countries. However, as the global credit crisis deepened, so did its woes; for the first half of this year, it reported a net loss of $1.5 billion.
Last year, Royal Bank created RBS Americas to "leverage synergies" between Citizens and a New York unit, Global Banking and Markets America, which includes the fixed-income unit RBS Greenwich Capital and the parent's U.S. corporate and institutional banking business. If it were to sell Citizens, Royal Bank would likely retain Greenwich, the London analyst said, because it would still need access to the U.S. bond market.
Officials in Edinburgh and Providence would not discuss the matter for this story. Stephen Hester, Royal Bank's new CEO, said last week that the government investment has "strengthened RBS considerably," and that his company "will focus on rebuilding RBS on its powerful customer franchises globally and, in time, deliver the economic returns that all our shareholders expect and deserve."
Alex Potter, an analyst at Collins Stewart PLC in London, said that Citizens is "a mom-and-pop" institution that may be one of the operations its parent would retain. "Citizens has been one of the better-performing parts of the business, and it remains an important part of the group," Mr. Potter said.
The unit has not been immune to the U.S. credit troubles. Its first-half operating income fell 41% from a year earlier, to $726 million, as a result of a quadrupling in impairment costs, to $712 million. But a 13.3% increase in corporate and commercial lending offset shrinking consumer portfolios; Citizens' overall loans rose 1.5%, to $113.7 billion.
Mr. Maneri said Royal Bank has shown "some willingness" to dispense with parts of its U.S. operations. It recently agreed to sell 65 Indiana branches to Old National Bancorp in Evansville, and this year it sold 18 branches in upstate New York to New York to Community Bank System Inc. of DeWitt. Still, "you have to decide whether to sell it in pieces or to do it in one fell swoop," Mr. Maneri said.
Royal Bank may find a few suitors for the entire network, he said. Citigroup Inc. would make the most sense, he said. Citi, which missed out on acquiring Wachovia Corp.'s banking business, has said it is still interested in a similar opportunity in the United States. On Tuesday it did not respond to a call seeking comment.
Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets, said in an interview that Morgan Stanley, M&T Bank Corp., or Toronto-Dominion Bank could be interested in the entire retail bank. Morgan Stanley, which recently became a bank holding company, has said it is in the market for bank acquisitions. "There are ample buyers, assuming they put it up for sale," Mr. Cassidy said, and the likelihood of a sale depends on whether the parent decides to pull back geographically or to ratchet back on risk. "I think they'll get out of high-risk areas, and U.S. banking is not one of them." M&T, Toronto-Dominion and Morgan Stanley declined to comment. Mr. Maneri said the list of possible buyers would increase if Royal Bank decided to sell branches, as it did in Indiana. "Just about anyone would be interested" in buying branches.
