Royal Bank of Scotland Group Plc expects to post a “substantial” full-year loss after transferring 38.3 billion pounds ($61 billion) of its worst loans to an internal bad bank under government pressure.
Britain’s biggest publicly owned lender expects to log as much as 4.5 billion pounds of writedowns in the fourth quarter as it starts to sell the loans, Edinburgh-based RBS said in a statement today. It will also speed up plans to sell its Citizens Financial Group Inc. unit in the U.S.
Chancellor of the Exchequer George Osborne is trying to recoup some of the cost of RBS’s 45.5 billion-pound bailout before an election due in 18 months. He started a review in June to consider whether the bank should be broken up. While the government has been able to start reducing its stake in Lloyds Banking Group Plc, RBS has been hobbled by souring loans and past regulatory mis-steps.
“We may have avoided the worst excesses of a full blown good-bank/bad-bank split but you are getting a lot of the medicine in the form of accelerated loss recognition as assets are managed for speed and not value,” said Ian Gordon, an analyst at Investec Ltd. in London, who rates the bank a sell. “A lot of shareholder value is being destroyed.”
The stock fell as much as 5.7 percent and was down 3.7 percent at 354.20 pence as of 8:29 a.m. in London trading. That’s below the 407-pence price at which the government would break even on its 81 percent stake. By contrast, Lloyds, which received a 20 billion-pound rescue during the crisis, has increased 61 percent this year, allowing the government to sell a 3.2 billion-pound stake in September.
“RBS will deal decisively with the problems of the past by separating out the good from the bad,” Osborne said in a statement. “It means less exposure for the British taxpayer.”
RBS’s net loss narrowed in the third quarter to 828 million pounds from 1.4 billion pounds in the year-earlier period. The lender set aside an additional 250 million pounds to compensate clients wrongly sold payment-protection insurance, taking its total provision to more than 2.7 billion pounds.
“There are a lot of deep problems in this bank that need sorting out,” U.K. Business Secretary Vince Cable told BBC television today. “There’s no question of a quick turnaround and a quick sale. It would be in the next parliament almost certainly that we’ll be in a position to talk about sale, but not in this parliament.”
The bad bank will include 14.8 billion pounds of assets from its core unit and 23.5 billion pounds of non-core assets. The bank will sell or run down 55 percent to 70 percent of them in the next two years and the rest within three.
“In light of the new strategy to deal with our high risk assets we expect a significant increase in impairments in the fourth quarter,” Chief Executive Officer Ross McEwan, 56, said in the statement. That “is likely to result in the group reporting a substantial loss for the full year.”
RBS will also speed up plans to sell its stake in Citizens, the U.S. consumer and commercial lender it acquired in 1988. The lender will sell an initial stake in the second half of 2014 and sell the rest by the end of 2016. The original plan, outlined in February, had been to start an initial public offering in two years.
The measures will allow RBS to reduce risk-weighted assets by 35 billion pounds by the end of 2016 and bolster its capital ratios. RBS said today it will seek to have a core Tier 1 capital ratio of at least 12 percent under the latest round of Basel rules by the end of 2016. Today, the measures stands at 9.1 percent.
McEwan is also working at removing the biggest hurdle to the bank resuming dividend payments to its shareholders. RBS said it was in “advanced discussions” with the Treasury about removing the dividend access share, which was created in 2009 and gives the taxpayer priority over ordinary shareholders.
The lender also said it’s cooperating with regulators investigating the possible manipulation of foreign-exchange markets. RBS is reviewing its communications and procedures, according to its statement.