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With no bidders coming forward to take Citizens Bank – RBS’s U.S. arm – off its hands, RBS is spinning it off in an IPO.SANG TAN/The Associated Press

The U.S. economy is on the mend, financial regulators have almost completed their widespread crackdown and interest rates could soon start to rise. All of that should make U.S. banks look more attractive.

Not so for Citizens Financial Group Inc.

Over the past year, Citizens, Royal Bank of Scotland's U.S. retail and commercial banking arm, has been trying to find a buyer because the U.K. government is fed up with RBS and wants to raise cash. Citizens has scoured the world over and talked to Canadian and Japanese banks, but no bid has emerged, according to the Financial Times, forcing the bank to proceed with option No. 2: an initial public offering.

Digging through Citizens' IPO filing, you can see why any potential bidders would be hesitant. Although adjusted net income climbed to $654-million (U.S.) last year, up from $506-million in 2011, any acquisition would come with a lot of question marks.

Just last year Citizens took a bruising $4.4-billion writedown, stemming from a string of acquisitions it made over 20 years. RBS first bought the bank in 1988 and ultimately struck 25 deals before the financial crisis. A number of them were inked at inflated prices, and Citizens is now coming to terms with that.

Citizens' top line is also shrinking, falling to $4.7-billion last year, down from $5.1-billion in 2011. Clearly management is concerned, because the bank launched a big cost-cutting initiative midway through 2013 to protect its bottom line amid this trend.

The bank's return on equity isn't pretty, either, amounting to 2.7 per cent in 2012. (2013's figure is skewed by the non-cash goodwill writedown.) Toronto-Dominion Bank's return on equity in the U.S., for comparison's sake, came in at 8.1 per cent in 2013 and 6.4 per cent in 2012, which is itself considered weak.

Some of those things can be easy to look past. If you're thirsty for a U.S. deal, you might be willing to take the long view, provided you can get Citizens for a good price. The problem is that doesn't seem like an option.

Because Citizens sold some of its Midwest branches to U.S. Bancorp earlier this year, there is already a precedent transaction in the market. And it's an expensive one. The sale unloaded $5.3-billion worth of deposits, and RBS was to be paid a $315-million premium above this value.

TD Bank chief executive officer Ed Clark hinted at his reservations about the price tag shortly after. "U.S. Bancorp's Richard Davis is a fantastic banker … He's a very smart guy," he said at a bank conference in January. "But that's a pretty high price to pay for the branches, and it is not obvious to us, certainly in our marketplace, that we would do that."

Mr. Clark then went on to say that a deal just didn't make sense for TD right now because the management team is in transition as he prepares for his retirement in November. "The acquisition word is not in our rhetoric, and I think for obvious reasons," he said.

Both the Financial Times and the Wall Street Journal reported that Citizens also made overtures to Japanese banks, including Sumitomo Mitsui Financial Group Inc. and Mitsubishi UFJ Financial Group, but they too were worried about having to pay top dollar.

Citizens had $122-billion in assets at the end of 2013. Its biggest share of deposits is in Boston, followed by Philadelphia and Providence, R.I., where it is based.

Now that the bank is finally pursuing an IPO, management struck a deal with RBS such that it will be granted a limited licence to use certain RBS trademarks, such as the "daisywheel" logo, for 10 years after the IPO, but will have to remove the RBS brand name from any of its products and services once RBS falls under a certain ownership threshold. Such a deal echoes the arrangement ING Bank Canada reached with its parent company after Bank of Nova Scotia bought the Canadian operation in 2012.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 3:07pm EDT.

SymbolName% changeLast
BNS-N
Bank of Nova Scotia
+1.49%51.92
BNS-T
Bank of Nova Scotia
+1.27%70.3
CFG-N
Citizens Financial Group Inc/Ri
+1.09%36.21
TD-N
Toronto Dominion Bank
-0.33%60.44
TD-T
Toronto-Dominion Bank
-0.52%81.84

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