Royal Bank of Scotland warned on Friday that it would make a substantial loss this year after its new chief executive Ross McEwan announced £38bn of troublesome assets would be ringfenced inside the bailed out bank.
In an move that was seen as an attempt to restore the often strained relationships with the government and regulators, McEwan also made clear he wanted to draw a line under lingering concerns about the bank’s capital position. On a number of occasions he talked about “resetting” relationships with the Treasury and the Bank of England.
He acknowledged the stinging criticism contained in a report into the bank’s lending practices, which found it was turning away three out of every four applications for business loans from small and medium-sized businesses and was too aggressive to towards existing customers facing financial difficulty. McEwan said that while the report made uncomfortable reading, the bank had to confront the problem.
The review into creating a bad bank — commissioned by the chancellor, George Osborne, after the Mansion House speech in June — had concluded the “effort, risk and expense involved in the creation of an external bad bank is not justified”. Investment bank Rothschild, which conducted the review which was recommended by the parliamentary commission on banking standards, said it would “do more harm than good”.
Pat McFadden, the Labour MP who sat on the commission, tweeted: “So RBS will have an internal bad bank, as it has had for five years.”
RBS shares were the biggest faller in the FTSE 100, down 3.5% at 355p — well below the 500p average price the taxpayer paid for them — after the bank reported a third-quarter loss of more than £600m.
Osborne, who through UK Financial Investments owns 81% of RBS, said the bailed out bank was on a “new direction”. A report published by the Treasury showed that RBS would become more UK-focused with even smaller investment bank — which employed 25,000 before the bailout and now employs 9,000.
Instead of the bad bank, which the taxpayer would have had to fund, about £38bn of troublesome loans — including £9bn from Ulster Bank — will be placed into a new non-core division to be known as the capital resolution division, which will aims to be wound down in two years. Some £11bn of capital should be released as a result.
McEwan — who said he wanted to “reset the key relationships” with government and regulators — will accelerate the spin-off of RBS’s US arm, Citizens, to next year rather than 2015 and signalled a review of a large number of businesses, the outcome of which will be announced in February. Ulster Bank is likely to remain part of RBS Group.
The New Zealander, who has been chief executive since 1 October, would not comment on the potential impact on jobs as he discussed the need to cut costs.
Creating the new non-core division would mean the bank has to write off up to £4.5bn of problem loans in the next year — driving the bank to a “substantial loss” for the full year.
Despite the warning of the losses, 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.” He conceded though that a sale of the government’s stake was unlikely to happen before the next election.
The bank took a fresh provision for payment protection insurance mis-selling of £250m — taking its total bill so far to £2.65bn and admitted it was involved in new investigation into alleged manipulation of foreign exchange markets. McEwan would not comment on reports two traders had been suspended.
Hired by Stephen Hester a year ago run the retail bank and now promoted to the top job, McEwan said: “I took on the job because I believe we can make this a great bank for our customers. That’s also the best way to make RBS an attractive investment and a good place to work for all our employees.”
He said the Bank of England’s Prudential Regulation Authority was preparing to ask banks to hold more capital and so RBS was acting in a “pro-active manner”. The Bank of England had found RBS would have had a £13.5bn capital shortfall at the end of December 2013, which is why it taking steps to bolster its financial strength.
The review into a possible bad bank had been conducted with the regulator. “The good bank/bad bank review has from the start been carried out in conjunction with the Prudential Regulation Authority (PRA). This has allowed us to address our shared objective of identifying ways in which to strengthen the capital position of the bank, speed up the recovery in our core UK businesses and accelerate the path to privatisation,” McEwan said.
RBS is now in discussions about releasing the dividend access share that would have forced the bank to pay dividends — when it could afford them — to the government before its other shareholders.
McEwan’s own review into the business will be unveiled in February and will cover customer-facing businesses, IT and operations and decision-making structures.
This article originally appeared on guardian.co.uk