RBS shares lose 7% after it decides against 'bad bank' split

 

RBS chief executive Ross McEwan is "delighted" following the decision not to split the bank

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Royal Bank of Scotland shares have lost 7.5% following news the 81% state-owned bank will not split itself into separate so-called good and bad banks.

RBS will create an internal "bad bank", ring-fencing £38bn of poor quality assets, such as loans it does not expect to see repaid.

However, some have questioned whether RBS would have been better splitting off its bad assets.

RBS also launched a review of how it treats its customers.

Start Quote

The idea is that when [the toxic debt] is gone, RBS will feel liberated”

End Quote

One leading figure who will look hard at the ring-fence plan is the Conservative MP Andrew Tyrie , who chairs the Treasury Committee and presided over a report this summer that recommended that the government should look in detail at the case for splitting the good and bad assets.

He told the BBC's World at One programme he would be looking into the reasoning behind the government's decision.

"The question... is whether this restructuring is enough to turn RBS round in reasonable time. I hope so but I remain concerned that it might not," he said.

RBS's shares were among the heaviest fallers on the FTSE 100 share index in Friday trading, down more than 7% at 340p.

'Honest'

RBS's chief executive, Ross McEwan, said he was pleased to end the good bank/bad bank debate because "the uncertainty had hung over the business for far too long" and had taken up too much management time.

Royal Bank of Scotland Group

Last Updated at 19 Dec 2014, 11:30 ET *Chart shows local time Royal Bank of Scotland Group intraday chart
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Chancellor George Osborne told the BBC's Today programme that RBS had been "painfully honest" about how weak a bank it was, and that the decision to create an internal bad bank "would make it easier to sell off the bank and get our money back".

In an implicit criticism of the previous boss Mr Hester, he also said that for the first time the government, the Bank of England and RBS were in agreement about where the bank was heading.

Shadow chancellor Ed Balls said the test for these changes would be "whether the taxpayer ultimately gets its money back and whether they actually boost business lending".

In all, three separate reports relating to RBS were released on Friday: the company's own third quarter results report, a report into its small business lending practices by Sir Andrew Large, and the one commissioned by the government into whether or not to spilt the bank into two.

The main points from the reports include:

  • No split into "good" or "bad" bank
  • Fencing off £38bn of bad quality assets within the bank to be then sold off
  • Speeding up of the sale of US subsidiary Citizens
  • Poor performance in lending to small businesses
  • Poor performance in serving individual customers - review launched
  • Another £250m set aside for mis-selling payment protection insurance (PPI)
  • Bottom-line loss of £634m for three months to end September
  • No plans to reduce 81% government stake in business - yet
Toxic

Chancellor George Osborne: "The best advice I got was that the best thing for the taxpayer was the internal 'bad' bank"

The decision to keep the bad assets within the bank, but ring-fenced and managed separately, goes against the guidance of the Parliamentary Commission on Banking Standards, which this summer said there was a case for removing toxic loans from RBS and keeping it in the public sector for the foreseeable future.

Toxic loans - or assets - include loans and mortgages that are not expected to be repaid, as well as more complex investments related to these bad loans.

Start Quote

RBS was a lousy lender to small businesses”

End Quote George Osborne Chancellor of the Exchequer

RBS said it would make a heavy loss this year partly because it plans to sell the assets - the bad loans - held by the internal bad bank, more quickly than originally planned.

It will sell up to 70% of these within two years, which will contain about £9bn of assets from Ulster Bank.

RBS said that it would take a charge of £4bn-£4.5bn in the current quarter to cover the losses on the loans.

The sale of its American bank Citizens will also be brought forward with a partial flotation planned for next year.

The Bank of England said that it welcomed the plans for RBS's future structure, saying: "These actions should create a more resilient institution that is better able to support the real economy without any expectation of further government support."

Small businesses

Ed Balls: "The jury is still out on whether these reforms will work"

The report on RBS's small business lending said the bank was performing so badly in that area it was not even meeting its own targets for the sector.

The bank says it will write to "thousands more businesses setting out how much more the bank is willing to lend them [and] cutting the length of time that loan applications can take".

RBS's review into how it serves its individual customers is scheduled to report its conclusions early next year.

Like its fellow banks, RBS has been caught up in the mis-selling of payment protection insurance (PPI) - cover customers either did not need or did not qualify to use - and other banking scandals.

Start Quote

Any relief at the avoidance of a full break-up is tempered by significant shareholder value destruction in measures announced today”

End Quote Ian Gordon Investec

In a separate development just ahead of the results, RBS suspended two traders in connection with an investigation into the possible manipulation of foreign exchange rates.

Earlier this year, RBS was fined hundreds of millions of pounds for its involvement in rigging Libor interest rates.

The future of Ulster Bank, an important lender in both Northern Ireland and the Republic of Ireland, will be decided in the customer review, which as well as service standards will look at its costs.

Mr McEwan, who took over as the bank's chief executive from Stephen Hester in September, refused to say whether this could lead to job cuts.

Privatisation

RBS is still 81%-owned by the taxpayer, but unlike Lloyds, in which part of the taxpayer's stake was sold recently, there are no immediate plans to reduce that investment.

The BBC's business editor, Robert Peston, says the first stages of privatisation are unlikely to take place until after the 2015 general election.

The government bought the shares at the height of the financial crisis at just over 500p a share, well above the current value of around 360p.

Ian Gordon, from Investec, said the moves announced would do little to help bring the share price back up to break-even level for the government.

"A dreadful day for RBS as political expediency overrides shareholders' best interests," he said.

"Any relief at the avoidance of a full break-up is tempered by significant shareholder value destruction in measures announced today."

RBS's pre-tax loss of £634m for the three months to 30 September took into account a number of one-off charges, including the extra £250m for PPI mis-selling.

Group operating profits for the quarter fell to £438m, down from £909m a year earlier.

 

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  • rate this
    +1

    Comment number 536.

    At last a private enterprise that is made to keep its own debts as well as the profitable parts.

  • rate this
    0

    Comment number 535.

    I would let them go in under in 2008 and said so publicly when I was Chairman of a major institution. The govt could then have acquired the retail and commercial arms in a new company at a very favourable rate. This new national bank properly run could be eventually floated allowing the govt to get its money back at a profit. This way the shareholders and the casino bankers would take the hit.

  • rate this
    -1

    Comment number 534.

    #501
    They don't need to be split, just banned from using savers' deposits and current account deposits to finance or prop up derivatives trading. In other words, using the money only for what it was deposited for.

  • rate this
    -1

    Comment number 533.

    so no get quick rich for the financiers and greedy bankers I wonder why there must be something explosive destructive contained in its debts hidden away

  • rate this
    +1

    Comment number 532.

    RBS has already offloaded the vast majority of its toxic loans, the £38 billion represents a fraction.

    The price will rise again as RBS gradually offloads the remainder & once disposed of, share price will rise even more.

    The only doubts as to RBS share value is as yet unknow settlements/fines for any other outstanding bad/negligent/criminal behaviour, which RBS is not alone.

  • rate this
    0

    Comment number 531.

    30. Alpharius
    "If they have loans they have deemed "unlikely to be repaid", why the hell did they loan out the money in the first place?"

    They weren't bothered if you could repay. They would package the laon up with loads of other loans, mostly bad but some good, and sell them as investments (CDO's). Then take out insurance (CDS's) that would pay out when the loans went bad

    Win Win for them.

  • rate this
    +2

    Comment number 530.

    I see another 2 scamsters from Barclays have been exposed today...that bank is just a breeding ground for villains....when will it be tackled properly?

  • rate this
    0

    Comment number 529.

    524. christhechameleon

    Try to get some perspective on things.
    =

    Right, and my perspective is the bonus culture is wrecking lives and the economy, from rate rigging, professional negligence to mis-selling swaps et al...
    A handful get very rich at everyone else's expense.

    And what's more the poison of greed is wrecking their own industry and risking their own livelyhood's, how dumb can you get?

  • rate this
    -1

    Comment number 528.

    But the jury isn't out on Labours handling of the banking system, or the ensuing crisis, or the economic mess either. Unless you are a died in the wool completely blinkered leftie with no economic sense at all.
    Scottish chancellor, buys Scottish bank to placate Scottish voters, UK left with bill, economic advisor becomes shadow chancellor and wants proper job.

  • rate this
    +1

    Comment number 527.

    So who's going to buy the £38BN of bad debts?! And why would they pay that much for them if there's huge risk. Sounds like they're being written off at the tax payer's expense to me.

    Create money from nothing, spend it on vote winning, we all work to earn a share of that nothing, then pay taxes to service the debt on that nothing that was conjured up on a computer.

    Got to love QE :)

  • rate this
    0

    Comment number 526.

    RBS must be in an awful state and nobody is to blame.
    Not ready yet to produce a profitable bank for the city to make a fast buck from. Must still be large potential losses for the taxpayer. When do we get our money back ?

  • rate this
    0

    Comment number 525.

    seems to be one of the few banks making no profit. Must be embarrassing for the Top business community to see a Canadian running the bank of England and a new Zealander running the taxpayers bank .

  • rate this
    -1

    Comment number 524.

    520 Sixp

    "Educate yourself..."

    Thanks.

    I understand that banks were prosecuted for not having the necessary controls in place to stop their customers laundering money.

    It's a high risk business - without the proper controls, you can go to prison.

    If a shop chain employs someone who robs the till, does that mean that the shop is crooked?

    Try to get some perspective on things.

  • rate this
    -1

    Comment number 523.

    What a scandal and disgrace. Yet, the public stand by and let it happen! The Govt still supporting this corrupt bank and then when it makes profits having been propped up by taxpayers money, then selling it to cronies in the city. Where has any justice gone in this country? The average person is dying in this country whilst the bankers continue to get rich.

  • rate this
    +2

    Comment number 522.

    I think they should turn every RBS branch into a trendy wine bar.

  • rate this
    +1

    Comment number 521.

    Be careful what you ask for. Aspects of an economies are connected just as they are in any given ecosystem, changes you make in one place have a habit of reflecting in a completely different area of the economy and usually not for the better. Its a balanced system that believe it or not generally works as long as a few individuals are not rogue and abuse the trust that is embedded in the system.

  • rate this
    0

    Comment number 520.

    517. christhechameleon
    ==
    Educate yourself..

    http://www.telegraph.co.uk/finance/financial-crime/9736167/HSBC-pays-1.92bn-to-settle-US-money-laundering-claims.html

    The bonus culture led to many cases of falsification and mis-selling (there have been a handful of prosecutions). Sub prime was built on rating agency assisted mis-selling.

    You forgot to mention libor and the currency rigging ...

  • rate this
    +1

    Comment number 519.

    508. Chubby1

    But who is going to finance these "Inventors, entrepreneurs, scientists, andpeople with ideas"? Who is going to do their banking, help them float on the stock exchange and get more investment when they need it.

    Perhaps you think the magic fairies do this? If we didnt need a banking sector then there wouldnt be one.

  • rate this
    +2

    Comment number 518.

    Who cares how much greedy investors value a bank?

    I get it that regular people own shares too, but its the people who own millions in shares that hold a gun to the heads of our politicians with threats of moving money etc.

    The share price fell. Suck it up. No more bending over to make these lizard people happy.

  • rate this
    0

    Comment number 517.

    513 Sixp

    "falsification of mortgage applications"

    Why would a bank falsify someone's mortgage application? Isn't it the customers that do that?

    Why would a bank launder money? Isn't it the customers that do that?

    And as far as I am aware "mis-selling" is handled by the civil courts, not the criminal system.

    Which newspaper do you read?

 

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