Ten reasons why a mass-market sale of NatWest stock is now a bad idea

In May last year I wrote a column recommending that if the government wanted to revive a flagging equity culture among Britain’s private investors, it should consider weaponising the stake it still owns in NatWest bank (42 per cent then; 35 per cent today) and sell it off, perhaps at a discount, to the great British public.

By November, chancellor Jeremy Hunt was on board with the idea. It now seems such a sale could happen before the summer. Sadly, much of the logic that applied nine months ago has evaporated. Selling shares to the British public now risks backfiring quite badly. Here are 10 reasons why:

1. Last May, NatWest stock was trading at close to 70 per cent of its book value. The benefits of divesting would have been substantial. As I argued back then, the vicious circle of the government’s overhang would have been broken, index funds would have had to buy, and the risk of government interference — present for more than 15 years — would disappear. Today, though, the shares are worth about 15 per cent less than then. Crystallising that loss would incinerate hundreds of millions of pounds of taxpayer value, especially as a straight share sale to private investors would probably need to involve a 10-20 per cent discount. It is far from clear that the National Audit Office could be persuaded to view this as a good deal.

2. One of the big reasons for NatWest’s share price decline, and its underperformance versus its Big Four UK peers (which are between 7 per cent down and 6 per cent up over that period) is that its leadership has been uncertain since July of last year, following the highly political ousting of then chief executive Alison Rose.

3. Rose had been backed by the NatWest board, and its chair Sir Howard Davies, despite an error of judgment in supporting the termination of former Ukip leader Nigel Farage as a client of private banking arm Coutts, and then making misleading statements about the reasons. The government overruled the board, after Farage rallied support from a range of senior Tories, including then City minister Andrew Griffith — the latest in a string of government interventions at the bank.

4. The whole affair led to a hasty appointment of a new chair, Rick Haythornthwaite. On Friday, having scrapped a full external search for a new CEO, he confirmed interim boss Paul Thwaite as Rose’s permanent successor — principally, it seems, so the government can press ahead with a summer share sale.

5. Hunt believes a mass sale of shares to the public could help revive an equity culture in the UK. But selling just ahead of an election would be blatantly party political — trying to recreate the Thatcherite excitement about mass-market equity investment, and exit the last of the big bank bailouts inherited from Labour in 2010.

6. The cyclical headwinds facing banks could well deflate share prices further, as credit losses caused by higher interest rates feed through, and margins on future lending are squeezed by shrinking rates. Thwaite downgraded profit targets on Friday.

7. Hunt has hinted that he could use next month’s Budget to revive the idea of a British equities Isa, a new twist on the tax-free savings account. That could give an extra incentive to buy the NatWest stock — though it would increase the likelihood of unsophisticated investors being overexposed to a high-risk equity.

8. The government’s heavy-handed intervention in the Rose affair, and a string of other controversial policymaking decisions, have led a broad swath of international investors to regard UK banks as uninvestable. Hunt seemed oblivious to this when he organised a recent roundtable with bank bosses to consider how to boost the perception of UK banks, and thereby the marketability of a NatWest offering.

9. Some bankers view the share plan as part of the broader attempt by the government to play short-termist games with the public finances as it prepares for an expected handover of power to Labour. Even liquidating, say, half the £7bn-£8bn of NatWest stock it owns would deprive Labour of an asset that might otherwise grow in value.

10. A mass retail sale would go against years of advice from Treasury officials and those within UKGI, the government investment arm, who have warned about the cost and complexity of such a move. 

There is one big-picture positive — if an offering does go ahead, NatWest could feasibly be on track to finally get the government off its shareholder register by the end of next year. For the bank and its new CEO, and ultimately the country, that can only be a good thing.`

patrick.jenkins@ft.com

Letter in response to this article:

Why government must sell its NatWest stake / From Pete Hahn, Emeritus Professor of Banking & Finance, London W9, UK