An AIG Across the Pond?

 | May 06, 2013 | 1:03 PM EDT
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Once upon a time, 81% of AIG (AIG) was owned by the government and no one wanted it or believed in it, as it was pretty darned clear that the place was a total mess.

But as Bob Benmosche began the cleanup process, the big funds clamored for pieces of it. The results? How about that move up to $44 done on the backs of repeated offerings by the government.   

I think the once-pathetic Royal Bank of Scotland (RBS) is not going to go through that  transformation and it is hard to argue with me that this one's done nothing for ages. Unlike most bank stocks, this one's down 16% for the year. Lots of analysts think that it deserves that punishment because it had a big shortfall when it reported this week past, including terrible markets results.

Many think that CEO Stephen Hester simply hasn't handled the reformation of the bank well and that it's more like Citigroup (C) after the run from $2 to $5 and then the back up after. Of course, that was before the ten-for-one reverse split. I say you have to excuse the not-so-hot markets business because RBS is trying its hardest to wind it down, to eliminate a lot of the leverage that got it in trouble in the first place. We are supposed to cheer that wind-down, not find the results wanting.

RBS has growth.

As Hester said in his statement with the earnings: "We are seeing the start of a pick-up in loan demand and we have strong surplus of funds ready and available to lend and we have a strong surplus of funds ready and available to fully support economic recovery."  

More importantly in a world where we have a fixation on net interest margins, the Irish and the UK both had NIMs that improved nicely over the previous quarter. Plus its Citizens Bank numbers gave you an 8% return on equity on par with the other regionals that were liked after the quarter. I think they could spin out Citizens to show more value if necessary ahead of the government's selloff that I expect to happen in 2014, or maybe even earlier. The capital levels here, by the way, are totally up to snuff, so it isn't like the company has to sell any shares, although they will still be selling off divisions to bring out even more value.

RBS has Tier-1 capital of 10.8%, up 50 bps this quarter (8.2% on a fully-loaded Basel 3 basis). Plus, Ireland has been turning a corner and the losses are down dramatically year over year. A turn in Ireland would be huge for this bank and it could be the cleanest way to play the rebound. A spinoff of Ulster Bank seems pretty logical, too.  

No one cares about RBS, just like they didn't care for AIG because of the government overhang. Overhangs are good when you have a bull market because there is a scarcity of supply out there and supply like RBS' common will beget demand.

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