Royal Bank of Scotland shares fall as group sets aside £38bn in internal ‘bad bank’

1st November 2013

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The beleaguered Royal Bank of Scotland has unveiled plans to ring-fence billions of pounds worth of toxic assets into a so-called internal bad bank.

The news came on the back of RBS announcing a third-quarter loss of £634m, significantly below city analysts’ predictions of a £440m profit according to the Financial Times. By 9:30am its shares had fallen by 14p or 4% to 353.6p.

The 81% taxpayer owned bank said it plans to switch £38bn of its riskiest loans into an internally managed bad bank, with the intention closing down the book over the coming three years.

RBS has asserted it will not split itself into separate so-called good and bad banks. The bank declared the restructuring would help to free up between £10bn and £11bn of capital, leaving it better placed to lend

On today’s results, the first overseen by chief executive Ross McEwan, who took over from Stephen Hester at the start of September, he says: “The options open to the group have been debated extensively by the board and the board has decided that RBS should take the actions we are announcing today.

“One of the first steps we are taking is to create an internal ‘bad bank’ to manage these assets down so as to release capital. Our goal is to remove between 55% and 70% of these assets over the next two years. While there is inevitable uncertainty associated with running down such assets, we have a clear aspiration to remove all these assets from the balance sheet in three years.”

Commenting on the news, Chancellor of the Exchequer, George 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.

“Under this new direction RBS will deal decisively with the problems of the past by separating out the good from the bad, and putting the bad loans in a bad bank. Our independent analysis shows that the bad bank should be an internal one, funded by RBS, rather than an external one funded by the taxpayer.

“RBS will focus on its core British business, supporting British families and companies. It will sell off more of its overseas operations and go on shrinking its investment bank, so it has more capital to support lending to the British economy. RBS is also committing today to the ambitious goal of becoming the best small business bank in Britain.The new direction for RBS is supported wholeheartedly by the management and Board of RBS, the Bank of England, the Government and UK Financial Investments (UKFI). The authorities look forward to supporting Ross McEwan and his team in implementing this plan.

“It means less exposure for the British taxpayer and more help for the British economy. That is why it’s good for Britain.”

Secretary of State for Business, Vince Cable, welcomed the news that the business will be creating a new internal bad bank. He added: “This will enable it to focus on business lending in the UK. It is clear that for many years RBS has handicapped our recovery by failing to provide the credit that businesses need. As Sir Andrew Large demonstrates, its SME lending practices are badly designed for supporting small businesses. After these changes good British companies, especially SMEs, should expect a more positive approach.”

The bank has also set aside a further £250m for payment protection insurance (PPI) mis-selling claims.

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