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RBS to be split in two under five-year reconstruction plan

’Good bank’ and ‘bad bank’ to be created under radical restructuring

James Thompson
Monday 23 February 2009 01:00 GMT
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Stephen Hester, the chief executive of Royal Bank of Scotland, is expected to admit that it will take up to five years to completely restructure the ailing bank, when it unveils a “radical” overhaul of its structure, including being split into two, with full-year results on Thursday.

In what promises to be pivotal week for the UK banking sector, Northern Rock, the Government-owned lender, will announce today that the Government is injecting up to £14bn of new funding into the nationalised bank over the next two years to increase its mortgage lending. On Friday, Lloyds Banking Group, which will unveil previously stated losses of more than £10bn, is likely to update on the potential placing of about £200bn of toxic assets into the Government’s asset protection scheme, the controversial insurance scheme designed to protect banks.

RBS will reveal a “radical restructuring”, which could take between three and five years, that will include plans to split the bank into core and non-core assets – effectively a good and bad bank, said market sources – alongside posting record losses of £28bn. It will also update on the placing of at least £200bn of separate toxic assets into the Government’s insurance programme and unveil a programme to deliver savings of more than £1bn.

Mr Hester will name some of the non-core assets it aims to sell to generate several hundred billions of pounds, although sources said this process could take years. RBS wants to close down or sell off parts of its investment banking arm, as well as its Asian operations and retail operations in central and eastern Europe, which will be bundled into its bad bank structure.

RBS has appointed Morgan Stanley to advise it on the sale of its Asian and Australian businesses. As The Independent revealed on Friday, RBS is understood to have sounded out Standard Chartered, the London-based Asian specialist, and Australia’s ANZ about the Asian operations, which include prized assets in India. RBS wants to offload all or part of the Asian operations it acquired when it bought ABN Amro.

RBS is understood to be considering selling retail banking operations while keeping licences and a wholesale banking foothold in key centres, such as Hong Kong, Singapore, Japan and India. A deal in India, with Standard Chartered, which is already the biggest international bank in the market, would fit this model. RBS plans to exit about half of the 60 countries in which it operates. RBS declined to comment.

When Mr Hester was at Abbey National, he and the former UBS banker Luqman Arnold delivered a similar splitting of the bank in 2002. Mr Hester set up the Portfolio Business Unit, into which he placed non-core assets.

The £1bn cost saving programme will result in hefty jobs losses of about 20,000, of whom UK employees will account for more than half, but it is understood that RBS will not provide figures on Thursday. It employs more than 180,000 globally.

Last month, RBS said it will report the largest annual loss in British corporate history of around £8bn this week, with a further £20bn written down in goodwill from acquisitions including its calamitous acquisition of ABN Amro, the Dutch banking group, in 2007.

The majority of its toxic loans relate to complex financial instruments used by its investment banking arm, such as derivatives and sub-prime loans.

Meanwhile, this weekend, Northern Rock was locked in talks that would see its timetable of loan repayments to the Government being eased or extended, which would enable it to start offering new loans to homeowners. Today, Northern Rock may reveal such a deal along with an injection of up to £14bn by the Government, in an effort to revive it as a major player in the mortgage market.

On Friday, Lloyds Banking Group will put flesh on the bones of its statement last month about its financial woes in the wake of its troublesome takeover of HBOS. While Lloyds will reveal that its HBOS unit delivered a pre-tax loss of about £10bn, the Lloyds TSB division is expected to remain in the black to the tune of about £1.3bn in pre-tax profits. Lloyds declined to comment yesterday.

While there will be substantial job losses as a result of its troubled acquisition of HBOS, it is unclear if there will be any update on numbers on Friday.

At the weekend speculation was also mounting that HSBC, which has not so far accepted any of the Government’s bailout money, may be poised to unveil a £10bn rights issue or a dividend cut with its numbers next Monday. HSBC declined to comment.

This week the Bank of England is expected to launch its so-called “quantitative easing” programme, which will result in at least £100bn being spent on buying bonds and gilts from UK banks, in an effort to revive the economy mired in recession.

Mervyn King, the Governor of the Bank of England, has written to Alistair Darling, the Chancellor of the Exchequer, to seek permission for quantitative easing, according to the minutes to the BoE’s last policy meeting.

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