RBS Restructuring: The Good, the Bad, the Costly



Thirty-eight billion pounds ($60.8 billion) of high-risk assets are being siphoned out of the Royal Bank of Scotland (NYSE: RBS) and will be placed in an internal “bad bank.” CEO Ross McEwan set the goal of removing 55 to 70 percent of the assets within the next two years. His statements and explanations of the process are printed in RBS’s third-quarter results, filed Friday. The 38 billion pounds in assets represents 20 percent of RBS’s capital.

McEwan said that over the past several months, RBS has been working with the U.K. government in discussing good-bank, bad-bank merits. The government is an essential player in RBS’s decisions because the bank is 81 percent government-owned following a bailout in 2008. A bad bank is created in order to remove toxic assets from a bank’s balance sheet; the entity buys the non-performing assets the bank holds, resulting in a loss to shareholders but not depositors.

In this situation, the establishment of a bad bank and how much money can be lost because of one is of interest to the British people. McEwan said that the actions he outlined for RBS “will create a bank that can reward the faith of UK taxpayers and all our investors.” He added that because of the interest of the British people, “[t]he bar has been set at a higher level for RBS than for other UK banks because we were rescued at the public’s expense.”

Chancellor of the Exchequer George Osborne said in an interview with BBC Radio that to reach the internal bad bank decision, the British government sought the “best independent advice,” and that the solution is one “supported by the whole government.”  He added, “We have gone for the approach that will mean RBS is now a boost for the British economy and not a burden.”

But with the operating and restructuring schemes costing a pretty pence, RBS probably seems more burden-like right now. RBS reported third-quarter non-core operating losses of 845 million pounds (approximately $1.34 billion). One year ago, losses were 586 million pounds (about $934 million). “In light of the new strategy to deal with our high risk assets we expect a significant increase in impairments in Q4 2013 which is likely to result in the Group reporting a substantial loss for the full year,” RBS said in its note to investors.

Losses and all, Osborne believes the bad bank decision ultimately assists the long-term goals of RBS and British citizens. “I think it does make it easier to sell off the bank and get our money back,” Osborne said, but the sale and return on investment is “not going to happen immediately with RBS.”

RBS will begin removing its American presence sooner, through a partial IPO of Citizens in early 2014. RBS plans to “fully divest the business by the end of 2016.” Osborne in his interview described the pullout from the United States as RBS changing its scope and goals to be “batting for Britain.”

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