Followers of the financial crisis in the United States are probably familiar with the federal recapitalization of the American banking industry. The biggest names in banking were partially owned by the taxpayer, at least until they repaid their debts, which the largest players have done and netted the taxpayer a significant profit on the deal. However, while government ownership of big bank shares has come to an end in the U.S., not all U.K. banks can say the same.
Still government owned
Not all U.K. banks are partially government owned, one example of a fully private bank would be HSBC Holdings plc (ADR) (NYSE:HBC) which has recovered much of the share price lost during the crisis and pays a 4 percent dividend. However the banks Lloyds Banking Group PLC (ADR) (NYSE:LYG) and Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) are still partially in the hands of the U.K. government.
Lloyds is 39 percent government owned and has considered reinstating a dividend but realizes this would anger the taxpayers still on the hook for bailing the bank out and has declined to do so as a result. Since the government stake in Lloyds is a minority stake and the bank is returning to financial health this bank is less subject to political winds than its counterpart, Royal Bank of Scotland Group plc (ADR) (NYSE:RBS). Unlike with Lloyds, the government controls a large majority stake in RBS to the tune of 81 percent. Because of this, much of RBS’s future is being hammered out in Parliament rather than in the RBS boardroom.
Proposals have ranged from a full nationalization of RBS, to a split of RBS into a good and bad bank, to a plan to give shares of RBS to all U.K. citizens. Needless to say, the decision by the U.K. government about what to do with RBS will be crucial to determining what value shareholders see in the end.
The closest comparison to Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) in the U.S. would probably be mega insurer,American International Group Inc (NYSE:AIG). Both companies were about 80 percent owned by their respective governments and the government owners exerted a degree of control to insure they would be repaid. AIG sold business units both in the U.S. and abroad to raise funds to repay the U.S. government while RBS has been downsizing, partially to raise funds to repay the U.K. government. In the end, the story has turned out positive for AIG shareholders (who bought after the collapse) as the insurer has been returned to private hands and the stock price has risen far from the bottom.
Investors in Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) should be aware that their investment carries the risk normally associated with a banking group but also the risk of government action to repay taxpayers in the way the government deems best. With many different unwinding proposals still up in the air, RBS is a more risky investment than a similar investment in HSBC or Lloyds. But investors with a greater tolerance for risk may find RBS to be a good banking industry play. The bank trades at less than half of tangible book value, a considerable discount to U.K. banking peers. If Royal Bank of Scotland Group plc (ADR) (NYSE:RBS)investors see and AIG type ending then RBS could prove to be one of the best remaining banking investments.
Alexander MacLennan has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group.
The article This Bank Is Still A Political Football originally appeared on Fool.com.
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