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RBS places troublesome assets worth £38bn in internal 'bad bank' RBS places troublesome assets worth £38bn in internal 'bad bank'
(about 9 hours later)
Royal Bank of Scotland warned on Friday that it would make a substantial loss this year after its new chief executive, Ross McEwan, announced £38bn of troublesome assets would be ringfenced inside the bailed out bank. Royal Bank of Scotland warned on Friday that it was on course for a substantial loss this year, dashing any remaining hopes of a return to the private sector until after the 2015 election.
In a move that was seen as an attempt to restore the often strained relationships with the government and regulators, McEwan also made clear he wanted to draw a line under lingering concerns about the bank's capital position. On a number of occasions he talked about "resetting" relationships with the Treasury and the Bank of England. Announcing that £38bn of troublesome loans would be ringfenced within the bank, the new chief executive Ross McEwan heralded a "resetting" of the often fraught relationship with the Treasury – owner of 81% of the shares – and the Bank of England, which regulates the bank and is poised to impose tougher rules on capital.
Chancellor George Osborne was in the main London office of RBS as the figures were released and conceded that any sell-off of the shares was unlikely before the election. McEwan said he wanted to move away from the "weariness" and "defensiveness" that had crept into RBS. McEwan who took the helm only a month ago after Stephen Hester was ousted in the summer, said he wanted to end the "weariness" and "defensiveness" that had crept into RBS. He is embarking on a review of all the bank's operations – including its troublesome Ulster operations in Ireland and the already-scaled back investment bank – which will be announced in February. He will accelerate the sale of the US arm, Citizens.
McEwan acknowledged the stinging criticism contained in a report into the bank's lending practices, which found it was turning away three out of every four applications for business loans from small and medium-sized businesses and was too aggressive towards existing customers facing financial difficulty. McEwan said that while the report made uncomfortable reading, the bank had to confront the problem. "The bar for RBS is higher than for any other bank because we got saved by the UK government," said McEwan. A highly critical report into its lending to small business found it turning away three out of every four applications for business loans and acting too aggressively towards customers in difficulty.
The review into creating a bad bank – commissioned by Osborne after his Mansion House speech in June – had concluded the "effort, risk and expense involved in the creation of an external bad bank is not justified". Investment bank Rothschild, which conducted the review recommended by the parliamentary commission on banking standards, said it would "do more harm than good". Unions feared a new wave of job cuts on top of 30,000 already axed since the 2008 bailout. Dominic Hook, Unite national officer, said: "Management claim that customer service is a priority for the bank and its reputation depends on it but RBS has cut staff numbers to the bone."
Pat McFadden, the Labour MP who sat on the commission, tweeted: "So RBS will have an internal bad bank, as it has had for five years." RBS shares were the second biggest fallers in the FTSE 100, down 7.5% at 340p – well below the 500p average price the taxpayer spent £45bn buying them for – after the bank reported a third-quarter loss of more than £600m.
RBS shares were the biggest faller in the FTSE 100, down 3.5% at 355p – well below the 500p average price the taxpayer paid for them – after the bank reported a third-quarter loss of more than £600m. Demonstrating a thawing of relations with the new boss, Chancellor George Osborne was at the London office of RBS for the announcement of the result of the review he had commissioned into whether the bank should be split up.
Osborne, who through UK Financial Investments owns 81% of RBS, said the bailed-out bank was on a "new direction". A Treasury report showed RBS would become more UK-focused with an even smaller investment bank – which employed 25,000 staff before the bailout but now employs 10,900. Osborne said the bank should not be involved in "speculating and punting on the markets". The study by financial advisers Rothschild, estimated to have cost £9m, stepped back from a full break-up and creation of a "bad bank" suggested by senior figures such as former chancellor, Lord Lawson and former Bank of England governor Lord King.
Instead of the bad bank, which the taxpayer would have had to fund, about £38bn of troublesome loans – including £9bn from Ulster Bank – will be placed into a new non-core division to be known as the capital resolution division, which will aims to be wound down in two years. Some £11bn of capital should be released as a result. Instead, about £38bn of troublesome loans – including £9bn from Ulster Bank – will be placed into a new non-core division to be known as the capital resolution division, which the bank aims to wind down in three years. This will mean writing off up to £4.5bn of problem loans in the next quarter – driving the bank to a "substantial loss" for the full year. But some £11bn of capital should be released as a result.
McEwan – who said he wanted to "reset the key relationships" with government and regulators – will accelerate the spin-off of RBS's US arm, Citizens, to next year rather than 2015 and signalled a review of a large number of businesses, the outcome of which will be announced in February. Ulster Bank is likely to remain part of RBS Group. McEwan insisted the government had not forced RBS into the new-look non-core bank, saying it had to listen major shareholders. "If you were a hedge fund and had 81% of the business you'd want to be having good conversations," he said.
The New Zealander, who has been chief executive since 1 October, would not comment on the potential impact on jobs as he discussed the need to cut costs. Commissioned following a recommendation by the parliamentary commission on banking , the review concluded the "effort, risk and expense involved in the creation of an external bad bank is not justified". A 150 page document published by the Treasury said creating bad bank would "do more harm than good".
Creating the new non-core division would mean the bank has to write off up to £4.5bn of problem loans in the next year – driving the bank to a "substantial loss" for the full year. Labour MP Pat McFadden, who sat on the commission, said the outcome "simply changes the name plate on what was already happening". Lord McFall, also on the commission, said on Twitter it was the "status quo w[ith] frills".
Despite the warning of losses, Osborne said: "Today RBS sets out a new direction – a new direction that will lead it to being a boost to the British economy instead of a burden. This is part of our economic plan for sustaining the economic recovery and creating a banking system that works for Britain." He conceded though that a sale of the government's stake was unlikely to happen before the next election. But Osborne said the bank was now set on a "new direction", to focus on the UK and small business lending and become a bank that would be "batting for Britain". A sale of the government's stake was unlikely to happen before the May 2015 election, Osborne said.
The bank took a fresh provision for payment protection insurance mis-selling of £250m – taking its total bill so far to £2.65bn and admitted it was involved in new investigation into alleged manipulation of foreign exchange markets. McEwan would not comment on reports two traders had been suspended. Sir Philip Hampton, RBS chairman who had previously indicated a sale could start next year, said that since its bailout RBS had pumped £15bn into Ulster bank, paid out more in compensation to customers and paid fees to the government which should be taken into account when assessing its share performance.
McEwan said the Bank of England's Prudential Regulation Authority was preparing to ask banks to hold more capital and so RBS was acting in a "pro-active manner". The Bank of England had found RBS would have had a £13.5bn capital shortfall at the end of December 2013, which is why it taking steps to bolster its financial strength. McEwan's aim is "to dispel any suggestions that RBS is travelling light on capital" at a time when the Bank of England is preparing to force all UK banks to hold more capital and more quickly than international regulations require. It is aiming for a 12% ratio in three years. The Treasury said the bank needed to "accommodate any additional headwinds which may adversely affect their capital resources, for example future costs of redress".
The review into a possible bad bank had been conducted with the regulator. "The good bank/bad bank review has from the start been carried out in conjunction with the Prudential Regulation Authority (PRA). This has allowed us to address our shared objective of identifying ways in which to strengthen the capital position of the bank, speed up the recovery in our core UK businesses and accelerate the path to privatisation," McEwan said. The bank took a fresh provision for payment protection insurance mis-selling of £250m – taking its total bill so far to £2.65bn, and admitted it was involved in new investigation into alleged manipulation of foreign exchange markets.
RBS is now in discussions about releasing the dividend access share that would have forced the bank to pay dividends – when it could afford them – to the government before its other shareholders.RBS is now in discussions about releasing the dividend access share that would have forced the bank to pay dividends – when it could afford them – to the government before its other shareholders.
McEwan's own review into the business will be unveiled in February and will cover customer-facing businesses, IT and operations and decision-making structures. An £8bn contingent capital facility which required the government to pump more money into the bank if its capital ratio fell is now being repaid a year early.
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