RBS advised that bid for ABN Amro could be profitable

Royal Bank of Scotland has been advised by Citigroup Global Markets to consider making a GBP36 billion hostile bid for Netherlands-based ABN Amro that could release GBP10 million of the Scottish firm's unrecognized value.

Equity research from Citigroup, which found Royal Bank of Scotland (RBS) is undervalued by 17% of its current market capitalization, suggested several methods of improving the bank’s stock, which has under-performed the European banking sector by 30% over the past two years.

One considered option was for RBS to sell its American division or its insurance business, but Citigroup concluded that any divestments would be too complicated.

Citigroup did, however, suggest that it could be beneficial to RBS to reverse its current strategy of no big acquisitions, as, according to the broker, RBS’s significant geographical and business overlap with ABN Amro would generate cost savings of GBP1.8 billion.

RBS’s successful takeover of NatWest in 2000 makes this a viable option, but Citigroup also suggested that no change and a continuation of current strategy could be superior to more radical alternatives.

The broker suggested that the changes already made by RBS, such as its focus on organic growth, represent a change in management that, although as yet unrecognized by the market, could still have a positive impact.