Would RBS' Citizens Financial IPO Lure Investors?

The New York Stock Exchange ('NYSE') is witnessing yet another big initial public offering ('IPO'). The floatation of Citizens Financial Group, Inc – the U.S. retail banking subsidiary of The Royal Bank of Scotland Group plc (RBS) is turning out to be the second-largest IPO this year, second only to the recent debut of Chinese e-commerce giant Alibaba Group Holding Limited on the NYSE.

Citizens raised around $3 billion through the initial stock offering of 140 million shares or 25% of its common stock at a price of $21.50 per share. Notably, the figure came below the expected price range of $23–25 per share. The offering is expected to close on Sep 29, 2014. The company will commence trading on the NYSE under the symbol ‘CFG.’

The underwriters have the option to buy an additional 21 million shares to cover any over-allotments.

Morgan Stanley (MS) and The Goldman Sachs Group, Inc. (GS) are the joint global coordinators while JPMorgan Chase & Co. (JPM) is serving as joint book runner for the deal.

Based in Providence, RI, Citizens, with its strong presence in the market for 186 years, has evolved through meaningful acquisitions and organic growth. In 1988, Royal Bank of Scotland acquired Citizens, which later expanded via 25 acquisitions. Citizens, currently one of the biggest regional banks in the U.S., has assets of $130.3 billion, 18,600 employees and around 1,200 branches across New England, mid-Atlantic and Midwest regions.

IPO Scenario So Far

The IPO market seems to have gained traction once again. According to a firm that tracks IPO performance – Renaissance Capital – so far in 2014, total IPO deals have raised $66.7 billion, exhibiting more than 100% increase year over year. However, the performance of Finance sector IPO has been dismal this year. Per the data of the firm, average first day return in the sector is 2% while the average total return is negative 0.8%.

The Consumer sector is leading with average total return of 39.8%, while Healthcare and Technology sectors that dominated the IPO space so far this year in terms of number of deals inked, have average total return of 8.6% and 15.5%, respectively.

RBS Restructuring Efforts Continues

Royal Bank of Scotland, which was bailed out with £45 billion by the British government in 2008 has been striving for growth with several restructuring initiatives that include cost reduction measures, increased focus on markets where it has a strong presence and long-term growth prospects, and improvement in its capital ratios.

In Feb 2013, Royal Bank of Scotland revealed its intentions to initiate the IPO of Citizens Financial in mid-2014. It will gradually exit this subsidiary by 2016 – the deadline set by the European Union as per bailout terms.

Per a recent release, Royal Bank of Scotland CEO Ross McEwan termed the launch of the IPO as “an important milestone for both RBS and Citizens.” He said, “The planned divestment will significantly improve RBS’s capital foundation and is a further important step in making RBS a strong and secure bank that continues to fully support the needs of its customers.”

Bottom Line

Royal Bank of Scotland has initiated the public listing of Citizens at a time when the banking space is encountering several challenges including slow economic recovery, persistent low interest rate environment, stricter regulations and a competitive landscape. While presently nothing can be inferred with certainty about the growth prospects of Citizens stock, it is a matter of time to see whether the pricing of Citizens stock is attractive enough to tempt investors.

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