Royal Bank of Scotland May Not Sell Auto Insurance Unit After All

By and | July 23, 2008

Royal Bank of Scotland looks increasingly likely to shelve plans to sell its insurance arm and turn instead to other smaller deals to top up its capital.

RBS announced plans to sell Britain’s largest car insurer in April. But the operation’s trading conditions have deteriorated and its top suitors have pulled out — leaving the bank with the unpalatable prospect of selling an attractive asset at a steep discount to its target price tag of around 7 billion pounds ($14 billion).

The outcome, bankers and analysts say, could be scrapping the sale of a unit that they say RBS was never keen to sell, boosting its balance sheet instead with other sales.

“It looks now as if there is a less than 50 percent change they will sell the business,” said Leigh Goodwin, analyst at Fox-Pitt Kelton. “If they didn’t get the right price from Zurich, why would they get a better price from Allstate?”

Zurich Financial Services had been seen as the front-runner to buy the insurance arm but pulled out last month, leaving Germany’s Allianz and U.S. firm Allstate as the last serious bidders, people familiar with the matter have said. Travelers has also been named as a suitor, though its interest has cooled.

“Clearly RBS would have liked the flexibility … but most investors would rather they didn’t sell the business in a forced sale. It’s not as if it’s a bad business, and selling it would be dilutive to earnings,” FPK’s Goodwin said.

Britain’s second-largest bank said in April it was targeting a core tier one ratio of more than 6 percent at the end of this year — taking on a bigger capital cushion than in the past to protect it in more turbulent market conditions.

That target, however, includes both the bank’s record 12 billion pound ($24 billion) rights issue, completed last month, and a 4 billion pound boost to capital from asset disposals — most of that from the sale of RBS Insurance.

Its core tier 1 ratio was under 5 percent before the fundraising, one of the lowest in the industry, after its purchase of parts of ABN AMRO and big writedowns stretched an already tight balance sheet.


RBS said in April there was scope for “fewer disposals” while still meeting its capital ratio target, and several smaller assets are still on the block and likely to go.

Analysts say that combined with RBS’s conservative payout ratio and its cash generation, which will help rebuild its capital ratios organically, these deals could well be enough.

Exane BNP Paribas estimates smaller deals could add up to around 1 billion pounds in disposal gains, leaving RBS just shy of its 6 percent target.

It will have even more options open in 2009, when it will be able to sell its five percent stake in Bank of China, currently worth some $7 billion.

“Even without a sale of Direct Line, we think RBS can get jolly close to its new six percent target,” BNP analysts said.

Adding to the sale of Angel Trains last month, which boosted capital by 250 to 300 million pounds, RBS is due to sell ABN Amro units in Australia and New Zealand, worth around 400 million pounds, in the coming weeks, despite the exit of one high-profile bidder, National Australia Bank.

RBS may also sell its Spanish insurance joint venture, which could be broken out from its broader insurance unit. It may also soon seal a deal to offload its half share in Tesco Personal Finance, its venture with the UK retailer, which is expected to fetch about 1 billion pounds — an 800 million capital gain.

In both cases, the stakes are expected to be sold to the joint venture partners — Bankinter and Tesco.

All of these would be dwarfed, however, if the bank did sell RBS Insurance. A price tag of 6 billion pounds, below RBS’s targeted price, would result in a capital gain of 2.7 billion pounds, boosting the core tier ratio by 0.51 percentage points, Cazenove analysts estimated.

But that now looks increasingly difficult.

(Additional reporting by Mathieu Robbins and Myles Neligan)

(Reporting by Clara Ferreira-Marques; Editing by Andrew Callus)

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