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The split of RBS

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RBS risks investment bank sale in EC fight

Royal Bank of Scotland may have to accept significant cutbacks in its investment banking division if the bank stands by its desire to keep US retail bank Citizens.

Selling Citizens, which has 26,000 employees, has emerged as one of Brussels' options for penalising RBS's receipt of state aid. Neelie Kroes, the EU competition commissioner, is understood to have taken RBS aback by the severity of her demands.

She has ordered the sale of the Churchill, Green Flag and Direct Line insurance businesses, more than 312 RBS branches in England, Global Merchant Acquiring, a card payments processing arm, and a reduction of the investment banking operations.

Source: The Telegraph

RBS loan-insurance gain mitigates Brussels pain

Royal Bank of Scotland has lost one battle further afield. But a likely victory closer to home could end up being more important.

Stephen Hester, the chief executive, returned from Brussels last week having agreed a painful surrender to Europe's competition commissioner, Neelie Kroes.

In return for receiving UK state aid in the form of insurance on £270bn of bad assets - and hopefully keeping its Citizens retail bank in the US - RBS is likely to sell its large insurance arm and offer up parts of its investment bank.

Investors previously thought the bank would have to sell only 312 branches in England and Wales to cut its share of small business lending.

As a result, they initially ran for the hills on Monday morning - RBS shares fell 15pc, and by 10am were still down 7pc in a rising market.

But investors should take heart from Hester's negotiations with the UK Treasury on RBS's loan-loss insurance terms.

As originally conceived, the policy covered £325bn of assets and would have required RBS to pay a fee of £17.5bn, largely up front but also by surrendering the benefit of accumulated tax losses. RBS would also have had to swallow a first loss of £19.5bn. While it looked like the bank would lose much more than £37bn in future years, this made sense.

But few analysts believe the bank will make such savage losses. Nor does RBS. To take up the insurance in its current form would involve intensely painful near-term costs for future protection of questionable worth.

Instead, RBS has agreed a new pay-as-you-go policy with a smaller, though as yet undisclosed, annual fee.

The new terms have a first loss of £37bn, or £60bn including losses already booked. A requirement for RBS to issue £19bn of B shares to the government, lifting the state’s stake to 82pc when they convert into ordinary shares, will remain. Coupled with the reduction in risk-weighted assets, RBS's core Tier 1 ratio will increase from 7pc to almost 13pc.

The new terms mean RBS will now be allowed to use tax credits to reduce the impact of loan losses as they arise. That will improve earnings over the critical next few years while credit-crunch losses wash through its system. Yet it will retain flexibility - it has cover against the extreme scenario of a prolonged, severe recession, but will be able to pay a fee to escape if things decisively improve.

Hester may feel bruised after his Brussels’ mugging. But he will have plenty of time to make the disposals – up to five years – and it is questionable whether the insurance arm was a strategically important asset to RBS - it may be worth more to someone else. The improved terms of the loan-loss insurance suggest he has focused on the right battle to win.

Source: The Telegraph


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