RBS shares jump as bank leaves the Asset Protection Scheme

RBS shares jumped straight to the top of the FTSE 100 leader board on Wednesday after the government owned bank confirmed that it would be leaving the Asset Protection Scheme (APS) on Thursday 18^th October.

The move by Royal Bank of Scotland is an important milestone for three key factors: momentum, savings on fee’s and the role of the tax payer.

1. Momentum

This marks an important milestone in the banks turnaround efforts since the height of the banking crisis in 2008 and 2009. The fact that the bank is no longer putting its toxic assets into an insurance scheme sends out a definitive message that this sort of protection or insurance is not needed and that the bank is now in a far better place to take control of its own destiny. The stabilisers are being removed. RBS had been the only British bank in the scheme and so certainly from a status perspective, this move eradicates some sentiment of fragility from the bank, at least compared to other banks both in the UK and broader Europe who are reliant upon state support either through insurance or direct capital injections.

It also helps to immediate sway any negative sentiment from the surprising last minute withdrawal of Santander from purchasing 316 bank branches, a move which now leaves RBS in a far weaker bargaining position to negotiate terms with other prospective bidders.

 2. Savings on fee’s

The move immediately saves RBS approximately £800m per year in fee’s that the bank was due to pay for the added protection the APS brings its toxic assets. RBS had to pay a minimum of £2.5bn in fee’s before it was able to leave the APS and it will reach that threshold this week, giving it the freedom to leave the scheme. Note that Lloyds paid the government £2.5bn not to be included in the APS back in 2009. The savings can now be factored into the banks turnaround.

3. The role of the tax payer

The move is also seen as one final hurdle in the ability of the government to return RBS to privatisation and sell the tax payers 83% stake in the bank. Of course, this may still take some time given that the tax payer is sitting on a near 20% loss on its stake value. The key now will be whether RBS shares can continue to gain ground. Shares have rallied some 48% since the lows of July, a huge move in a short space of time and outperforming the FTSE 350 banking sector, which has rallied 25% in the same time period. RBS shares need to recover back above the 300p level however, where significant resistance lies. It remains open to debate as to what price target George Osborne has in mind before selling the state’s stake in the bank, but certainly it would be highly controversial for him to do so before the tax payer can make a profit.