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 18 Sep 2014, 11:36 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 296.

    Osborne sold part of our shareholding in Lloyds for £3.2 billion.
    Has anyone got their money yet?

  • rate this
    -1

    Comment number 295.

    The difference between the finance industry and casinos? Casinos are regulated and have to abide by rules.

  • rate this
    0

    Comment number 294.

    The solution is very simple, open up banking to any business of any size. Under the current systems we could all be 'rich' being bankers and lending 10x our savings to others, kind of indicates the 'value' in banking doesn't it? Banks only make alot of money because there is no real competition.

  • rate this
    +17

    Comment number 293.

    In the good old days, UK banks, building societies and insurance companies each dealt with their own business areas and respective customers. Now we have "financial institutions" who appear more interested in things like "toxic assets" and risk speculation, rather than serving base customers. Recently, one of my RBS bank telephone operators told me "my manager does not speak with customers"!

  • rate this
    +8

    Comment number 292.

    I think what should be highlighted, as it thrown in quietly in the last line, the operations of the bank made a profit of £430m, not a small amount, but because of their work in fixing the past they have made a loss, do people not want the bank to fix the mistakes it has made? Just continue making these mistakes? I think this was an excellent result for RBS, people should read past the headline.

  • rate this
    +1

    Comment number 291.

    @272. dave87
    ---
    ridiculous statement. Cars, houses and holidays existed before credit. Life went on before the banks. The assumption that without banks 'everything would collapse' is at best a tenuos one. The things you describe will still be possible if say usury was outlawed tomorrow.

  • rate this
    0

    Comment number 290.

    274.therealist
    3 Minutes ago
    Love them or hate them, you can't live with them but you can't live without them.

    Yep, that's right - try renting a property getting a phone or even having a job without a bank account. Over the last 100 years we've all been suckered into that by very clever manipulation. Doesn't mean that we shouldn't change though. We've been paying twice for this for years.

  • rate this
    0

    Comment number 289.

    Given the way that RBS's Halifax Insurance company chose a "cowboy" builder to work on my home. I'm not surprised that it's in a mess.

  • rate this
    0

    Comment number 288.

    "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."


    What a wise government we have.

    Well done.

  • rate this
    +2

    Comment number 287.

    @275 Is that a direct quote? I don't remember saying that or are we just throwing random generalizations about to justfy using them? Here's one for you, all French people eat are snails and frog legs.

  • rate this
    0

    Comment number 286.

    The fantasy continues. The absurdity persists. The bank is as broken as Humpty-Dumpty. All the Chancellors accountants and regulators cannot put it back together again.

    Sell off the good bits, and there are many, and write off the remainder. Then get the people responsible for the original disaster into No 1 Court of the Old Bailey.

    The taxpayers will never get their money back!

  • rate this
    +1

    Comment number 285.

    @ 273

    What 268 is saying is sensible. Yes he is unhappy with how the system works but knows kneecapping London's banking system will remove the biggest contributor to this country's economy and will send the business and the money this adds to the economy to other parts of the world.

    People moan about cuts now, kill off the city and things will get 10 times worse.

  • rate this
    0

    Comment number 284.

    Banker bashing is becoming such a lazy narrative on HYS these days. Looking across the Channel let's see what happens when Hollande's 75% football supertax is implemented. Well, the French tax take will fall to exactly zero when Ibrahimovic and his colleagues sign for English, Spanish or German clubs eager for their services. Cutting off your nose to spite your face.

  • rate this
    0

    Comment number 283.

    When you've got deeply embarrassing evidence to hide the worst thing you can try to do is to move it.

  • rate this
    +7

    Comment number 282.

    268. bankskank
    I find it hilarious how many people would love to kill off one of our last truly globally competitive industries
    __
    We all need banks, but banks that operate in a sustainable long-term way. Not sure that cutting corners actually makes them 'competitive'.
    Banks lost it when they forgot they were a service industry and started making money out of thin air

  • rate this
    +11

    Comment number 281.

    Whatever happens we, the taxpayers, the true and rightful owners of this bank will never see ANY benefit for all the money we pumped into it

    Remember the Golden Rule: They who have the gold rule

  • rate this
    +3

    Comment number 280.

    This wont please George

    He was hoping the Royal Mail giveaway & "selling" (good)RBS off would massage the figures (4G sell off) for his claim of competence

    Even with cutting the essential to the bone & selling everything the Tories "management" is leaving us with record national debt (£1.5 Trillion & rising) & £120 billion yearly deficit

    Oh Dear, you're running out of things to sell George :S

  • rate this
    +24

    Comment number 279.

    272.dave87
    The banking system has funded everything you take for granted in life.
    ---
    Wrong. The banks do not create money, they are meant to grease the wheels of industry (service & manufacture), money from one place is lent to another to keep it all swishing around. Unfortuantley they have had their egos pumped up so hard they think they are ones to fund people's lifestyle. They don't.

  • rate this
    +5

    Comment number 278.

    "Advertising has us chasing cars and clothes, working jobs we hate so we can buy s*** we don't need. We're the middle children of history, man. No purpose or place. We have no Great War. No Great Depression. Our great war is a spiritual war. Our great depression is our lives. We've all been raised on television to believe that one day we'd all be millionaires, and movie gods, and rock stars...

  • rate this
    +4

    Comment number 277.

    Yet again we see the bankers willing to cover their own backs, while possibly inflicting more misery on the common man. It was the same industry who caused the misery the country has went through for the past 5 or 6 years. But they still get their million £ bonuses. Toxic banks will always cause a stink everywhere else, but they will let others suffer.

 

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