Royal Bank of Scotland segregates toxic assets as it reports third quarter loss

LONDON – The taxpayer-owned Royal Bank of Scotland said Friday it will segregate about 38 billion pounds ($62 billion) of soured investments to clean up its balance sheet in the aftermath of the financial crisis.

The move is part of a plan to get the bank in shape so the government can eventually sell its majority stake. But it will come at a cost — Friday’s move will result in a charge of 4 billion pounds to 4.5 billion pounds in the fourth quarter. Shares slumped 5.4 per cent to 346.7 pence on the news.

The government had earlier considered the possibility of splitting the bank into “good” and “bad” parts. The bad bank would have managed the soured investments. But the government concluded that such a split would do more harm than good, in part because it would distract management at a crucial moment.

Instead, RBS will create an “internal bad bank,” meaning it will segregate the soured investments, which represent about 5 per cent of the bank’s funded assets, and manage them separately. The goal is to sell or write-off 55 per cent to 70 per cent of these assets by the end of 2016

“While there is inevitable uncertainty associated with running down such assets, we have a clear aspiration to remove all these assets from the balance sheet in three years,” Chief Executive Ross McEwan, who took charge of the bank last month, said in a statement.

Former Treasury chief Alistair Darling, who oversaw the bank’s 45 billion-pound bailout in 2008 that gave the government a stake of about 80 per cent, said a lot of the bad loans would have to be written down. Irish property investments, in particular, would need to be sold at a loss.

Treasury chief George Osborne acknowledged that the time frame for getting rid of the assets means it is unlikely the government will sell its stake before the next election in 2015. Returning RBS to private ownership would have been a significant victory for the Conservative-led coalition.

“I wouldn’t feel comfortable going to the British people and saying ‘Invest in RBS’ until I was absolutely clear that it was on top of its problems,” Osborne told the BBC.

Ian Gordon, an analyst at Investec summed up the market’s reaction succinctly.

“Any relief at the avoidance of a full breakup is tempered by significant shareholder value destruction in measures announced today,” he wrote in a note to clients.

RBS also said Friday that it would accelerate the divestment of Citizens, its American banking subsidiary, planning an initial public offering for 2014. It made the announcement in its earnings report, which showed that the third-quarter net loss narrowed to 828 million pounds from 1.4 billion in the same period last year.

It also reportedly suspended two traders in its foreign exchange arm amid an international investigation into the manipulation of currency markets. McEwan declined to comment on the case but said the bank would come down hard on anyone breaking the rules.