Concerns that lucrative investment will be sacrificed for short-term needsBy John Phelps
Royal Bank of Scotland has hinted that it may sell its stake in Bank of China as Sir Fred Goodwin and his board review all options to boost cash resources in the aftermath of the credit crunch.
The value of its 5% interest in China's third-biggest state-owned lender, announced three years ago last Friday, has virtually trebled to about £2.35 billion since it controversially acquired the stake in 2005 and RBS will be free to sell its shareholding when a lock-in clause expires at the end of 2008.
While the group has stressed that its holding is a long-term investment, a spokesman told the Sunday Herald: "It is not our present intention to sell but circumstances may change in the coming months."
A disposal would mark another abrupt U-turn by the bank that specifically ruled out a sale at the time of its rights issue in April. Any move could also be opposed by a number of senior executives.
"I think there is little doubt that RBS will sell down part of their Bank of China stake soon after the lock-in periods expires," said analyst Ian Gordon at Exane BNP. "But they may well retain a smaller shareholding for political purposes."
Only last month, Gordon Pell, head of regional markets at RBS, and a strong candidate to succeed beleaguered chief executive Sir Fred Goodwin, stressed the importance of the investment to long-term planning. "In China it is important to pay attention to long-term relationships," he said. "If you think you can charge in and out you have misread how to do business in the country."
Much depends on whether RBS can make its predicted £4bn profit this year from the sale of its insurance operations and the Australian banking interests acquired with the ABN Amro takeover last year. Some believe that another key consideration is the progress of the group's joint ventures with the formerly state-owned bank.
On the positive side, the pair have enjoyed remarkable success with the launch of a credit card that is believed to have attracted two million new customers in the past six months alone, taking its client base past the five million mark.
In contrast there has been a distinct cooling of attitudes towards their joint involvement in wealth management-a key area of co-operation - after opening just two branches and attracting only 400 wealthy families.
RBS is now believed to be planning to open similar branches on its own through the newly-acquired ABN network, which already manages almost £1bn in funds.
For its part, Bank of China appears to be looking elsewhere for advice after snapping up a 30% stake in a Swiss hedge fund specialist last week, claiming it was attracted by the company's talent pool and its experience in fund management.
At the same time, plans for a joint venture in insurance have been thrown into confusion after the government pushed through new rules last month enabling Bank of China and the other domestic banks to buy out existing insurance companies for the first time.
At this stage, Bank of China appears to have gained more from its relationship with the Scots who have been able to advise on credit controls, information systems and other aspects of commercial banking.
Even so, the Chinese have also suffered from the fallout from the American mortgages fiasco and only last week they had to rush out a statement to say that their exposure to the troubled Fannie Mae and Freddie Mac funds was "manageable" amid rumours of heavy losses.
The first signs of an imminent divorce could come if RBS decides to scrap plans to raise upwards of £6bn for its insurance interests after failing to attract a suitable offer.
Discussions were said to be continuing last week, although directors are in no mood to accept cut-price deals for a division that is likely to be a star-performer in this week's results presentation, with half-year earnings likely to show an increase from £363m to £450m or more.
The group needs to raise funds to repair its balance sheet because of losses caused by the credit crunch, even after raising £12bn from shareholders earlier this year.
Brokers at Exane BNP Paribas believe that bad debts in the US and other provisions could leave the group nursing a £1.25bn overall loss when it announces half year figures on Friday, while the team at Deutsche Bank believes the deficit could be as high as £1.5bn.
Analysts are concerned about the potential for further problems at the group's American banking operations and its £100bn plus exposure to troubled commercial property markets as well as the deterioration in general global economies.
Despite the worries, a number of brokers have put out buy circulars on RBS shares in recent weeks and a consensus of analysts polled by Hemscott looks for underlying profits of about £9.2bn, down from £9.9bn last year, excluding provisions and impairments.
