Royal Bank of Scotland (RBS) has today confirmed plans to ring-fence £38 billion of toxic assets, such as loans it does not expect to have repaid, into a new division.
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div>Royal Bank of Scotland (RBS) has today confirmed plans to ring-fence £38 billion of toxic assets, such as loans it does not expect to have repaid, into a new division.
Announcing a third-quarter pre-tax loss of £634 million, RBS said £38 billion of impaired loans would be placed into an “internal bad bank’ called RBS Capital Resolution Division, being set up next year.
The Bank’s bad quality assets will then sell off up to 55 per cent to 70 per cent of these bad loans within two years, which will contain about £9 billion of assets from Ulster Bank.
It’s predicted that the move will free up £10-11 billion of capital and the Bank hopes to remove all the assets from its balance sheet within three years.
The future of Ulster Bank, an important lender in both Northern Ireland and the Republic of Ireland, will be decided in the customer review.
Today’s announcement comes as part of an effort to accelerate its recovery after the Bank, which is 81 per cent-owned by the government, following the £45.5 billion bailout at the height of the financial crisis.
The faster run-down of assets will accelerate and increase losses on the loans, and the bank expects to take an extra impairment charge of between £4 billion and £4.5 billion in the current quarter, to cover the losses on the loans.
Many commentators have debated whether RBS should have been split into ‘good’ and ‘bad’ banks, but the new arm of the bank is designed to provide a clearer distinction between the clean parts of the business and the tens of billions of pounds of legacy loans that critics say have hampered its ability to play a role in aiding the recovery of the UK economy.
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.”
"We can now go on, focus on the future and focus on 90 per cent of the assets that make up a really good bank and on building a great bank for customers and for the UK," he added.
In all, three separate reports relating to RBS have been released today: the company's third quarter results report, a report into its small business lending practices by Sir Andrew Large, and the report commissioned by the government into whether or not to split the bank into two.
The outcome of the four-month review commissioned by Chancellor George Osborne, and conducted by BlackRock and Rothschild, will see the rebranding of RBS’s existing non-core arm.
Mr Osborne said the reforms were part of a broader objective of "creating a banking system that works for Britain".
He added: “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.”
The Bank of England said that it welcomed "the development of a more focussed strategy for RBS and the commitments of the Board to specific actions that will bolster its capital position in the next three years.
"These actions should create a more resilient institution that is better able to support the real economy without any expectation of further Government support. Given these developments, the Bank of England fully supports the conclusions of the Review published today by HM Treasury.”
A report on RBS's small business lending said the bank was performing so badly on lending to small businesses 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.
RBS also launched a review of its businesses, IT operations and organisational structure aimed at improving its focus on customers. It said the results of this review, including plans to sharply reduce its cost base, would be disclosed in February.
Mr McEwan pledged to implement the recommendations, and said RBS would target becoming the best SME bank in the UK.
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