1st Nov 2013 08:37
LONDON (Alliance News) - Royal Bank of Scotland Group PLC Friday said it will establish an internal bad bank to run down GBP38 billion in troubled assets over the next three years, as third quarter losses narrowed year-on-year.
The decision to create an internal bad bank to manage RBS's toxic assets, which include poorly-performing and high-risk assets, means that it avoids a full good-bank bad-bank split.
RBS is 82% owned by the UK government.
The bad bank will manage a three-year run-down of GBP38 billion of high risk assets that RBS and the UK Treasury agreed would "be a drag" on its performance. The bad bank will include GBP9 billion in assets of Irish subsidiary Ulster Bank, as well as other non-core assets such as commercial real-estate and corporate loans.
"Through this review it has become clear that the effort, risk and expense involved in the creation of an external bad bank is not justified. The good bank/bad bank review has from the start been carried out in conjunction with the Prudential Regulation Authority. 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," Chief Executive Ross McEwan said in a statement.
The restructuring follows a review into the case for a bad bank, announced by UK Chancellor George Osborne in June, and avoided the creation of an external bad bank because it would have required more support from the UK taxpayer.
However, RBS said it expects the faster run-down of high risk assets to result in "accelerated and increased impairments" in the fourth quarter of GBP4.0 billion to GBP4.5 billion.
RBS and the Treasury are also in "advanced negotiations" with the European Commission over the removal of the Dividend Access Share, which was acquired by the government as part of its GBP45.22 billion bailout and prevents RBS from paying a dividend to shareholders.
A return to paying dividends could aid the privatisation of RBS by making the bank more attractive to prospective investors, though McEwan said in a conference call with journalists that the decision as to when the bank's shares are returned to the market is in the hands of the government.
RBS reported Friday a GBP634 million pretax operating loss for the three months to September 30, compared with a GBP1.37 billion loss for the corresponding period the year prior.
The bank also made a further GBP250 million provision for payment protection insurance, following Lloyds Banking Group PLC, which earlier this week increased its own PPI provision by GBP750 million. RBS's total PPI provision now is GBP2.6 billion, of which GBP1.9 billion has been paid out.
McEwan admitted that a review into lending to small and medium-sized businesses it commissioned earlier this year will not be comfortable reading for RBS. Andrew Large, a former deputy governor of the Bank of England who was commissioned by RBS to conduct the review, is set to show that RBS could do a lot more to expand its lending to SMEs.
While many of RBS's competitors have been able to increase their lending to SMEs in recent times, RBS's lending in this area has continued to contract.
The bank also announced that it would accelerate the sale of its US subsidiary bank Citizens, with an IPO expected in 2014 and full divestment expected by the end of 2016.
The IPO, which RBS had originally planned for early 2015, will be carried out in a similar way to the divestment of Direct Line, which is being sold in separate tranches following its IPO last year.
RBS shares were Friday quoted at 354.92 pence, down 3.5%.
By Samuel Agini; [email protected]; @samuelagini
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