October 31, 2013 / 9:04 PM / 5 years ago

Future of state-backed UK lender RBS set to be cleared up

LONDON (Reuters) - The future of Royal Bank of Scotland (RBS.L) should become clearer on Friday, with Britain’s finance ministry expected to reveal if it wants the state-backed lender to be broken up.

A woman is seen through scaffolding as she walks past a branch of the Royal Bank of Scotland in London September 17, 2013. REUTERS/Stefan Wermuth

Bankers and political sources say the most likely outcome is that RBS, 81 percent-owned by the government, will agree to create an internal ‘bad bank’ to house more of its problem loans, with the government deciding against a formal break-up.

The plan would see its existing non-core unit, home to bad loans worth 45 billion pounds ($72 billion), enlarged and revamped, with the run-down of those assets accelerated.

RBS Chief Executive Ross McEwan, who took up the role at the beginning of last month, will set out his vision for the bank publicly for the first time. RBS will also unveil its third-quarter results.

McEwan is expected to consider various options aimed at refocusing the bank on domestic lending, including speeding up the planned sale of its U.S. business, Citizens, and further slimming the bank’s investment activities.

A detailed strategic review is not expected until RBS’s 2013 results in February.

But Sky News, citing sources, reported that McEwan is expected to say the bank is undergoing a review that could mean substantial cost reductions, including job cuts, and the further shrinking of its investment banking arm.(link.reuters.com/myb44v)

Sky said RBS was likely to signal it is starting talks with the Treasury on reinstating dividend payments by buying out an instrument, called a dividend access share, that gives the state priority over dividends and has been seen as a major obstacle to privatization.

Sky added that it could take several years before regulators in Brussels approve the deal, expected to cost well over 1 billion pounds.

Another perspective on the bank will come from former Bank of England Deputy Governor Andrew Large, who on Friday will publish the recommendations of his independent review into the bank’s lending to small businesses, commissioned by RBS in July.

Large is expected to be critical of RBS’s lending record since it was rescued by the government via a 45.5 billion pound bailout during the 2008 financial crisis.

The Treasury, aided by investment bank Rothschild and U.S. asset manager BlackRock, has spent four months considering whether RBS should be made to hive off its soured assets into a separate legal entity.

Advocates of a break-up, including former Bank of England Governor Mervyn King and ex-UK finance minister Nigel Lawson, say it would leave the bank better placed to lend and support the British economy. But industry analysts argue it would be too expensive and complicated.

They say RBS has already wound down or sold off the vast majority of its bad loans and the need for approval from RBS’s minority investors makes the plan unworkable.

RBS is set to report an operating profit of 800 million pounds, compared with 1.047 billion the year before, according to forecasts supplied by the bank, reflecting the slimming down of its investment activities in response to political pressure.

($1 = 0.6228 British pounds)

Additional reporting by Richa Naidu; Editing by Tom Pfeiffer and Anthony Barker

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