Thank you for joining us, and welcome to our General Meeting. Today we are asking you to vote on a special resolution that would provide the bank’s directors with the authority to use some of its excess capital to buy back shares from the Government, at a time agreed with the Treasury. That is the single order of business of the meeting.
Moving to the business of the meeting, we consider it important to seek this authority now, rather than wait for our Annual General Meeting in April. If approved, it would provide the bank with the flexibility to buy shares during the intervening period, subject to the agreement of the Treasury.
Before coming to the proposal, I would like to take a moment to introduce my fellow Board members and our Company Secretary in attendance today. From your left to right, we have Mark Seligman, Ross McEwan, Katie Murray, Aileen Taylor, Robert Gillespie and Patrick Flynn.
I will now explain why the Board is unanimously recommending that our shareholders approve the resolution, before taking any questions that relate specifically to this order of business. You will have an opportunity at the AGM to raise questions on other subjects. In order to succeed, the resolution requires 75% of votes cast to be in favour. The Government has confirmed that it will not be voting its shares, in order to allow the rest of our shareholders to decide whether the resolution succeeds or not. The bank will not be able to buy back shares without the express agreement of the Treasury in any event.
The resolution would provide the Board with the authority to use some of the bank’s excess capital to buy back a portion of shares held by the Government, at a time agreed with the Treasury. A buyback would also require regulatory approval from the PRA.
At the end of the third quarter of 2018, the bank had a Common Equity Tier One capital ratio of 16.7%, above our medium term target of more than 13%. This is a result of building our capital reserves at a time when the bank was facing a number of highly uncertain legacy issues and restructuring costs. With those now largely resolved, it is our intention, over time, to return the excess capital to our shareholders.
Last year saw the bank report a bottom line profit and pay a dividend for the first time in 10 years. It also achieved a clear pass in the 2018 PRA stress test. Those were important moments in the recovery of the bank and have allowed us to start thinking about how to distribute our excess capital. It is important to note however that, at present, we believe it is prudent to maintain capital somewhat above our target as we manage our way through a number of issues, including Brexit and various regulatory changes to the way the bank must account for its capital.
A directed buy back is one way in which we can return excess capital to shareholders. The Board strongly believes that buying back Government shares would be a positive use of this capital, bringing benefits to the bank and its shareholders by helping to facilitate its return to private ownership. We have consulted a range of large investors who are also highly supportive of this course of action.
The resolution outlines three ways in which a directed buy back could take place. Each would require the agreement of the Treasury, and any decision on which one to use would be based on a wide range of factors.
The first is to buy back shares as part of a wider placement by the Treasury, where the price paid would be the same as that achieved through the open-market bookbuilding process.
The second would be a bilateral deal where the bank buys a certain number of shares at the relevant market price agreed with the Treasury and independent of any larger placement of shares.
And the third is a ‘trading programme’ where the bank and Treasury each nominate a broker to oversee the daily purchase of shares at the prevailing market price. This would continue for a fixed time period or until a pre-determined value of shares has been bought by the bank.
In June last year the Government undertook a further sell down of its majority stake in the bank, selling 925 million shares, raising total proceeds of £2.5 billion and reducing its stake to 62.3%. In addition, the Chancellor said in the Autumn Budget statement that the Government plans fully to exit its ownership of RBS by 2024. The timing of any future share sales is highly uncertain and entirely in the hands of the Treasury. These options provide flexibility in the event that both parties agree that they want to enter into a directed buy back.
Under the resolution, the bank is limited to buying back a maximum of 4.99% of the ordinary share capital from the Treasury in any one year. At current market prices, that would reduce the bank’s CET1 ratio by 70 basis points. It should also be noted that the three options are not mutually exclusive. More than one can be used during the period, so long as the number of shares does not exceed the upper limit.