RBS braced for savage cuts as Neelie Kroes spells out true cost of state bail-out

Published on Monday 2 November 2009 21:06

ROYAL Bank of Scotland chief executive Stephen Hester has been forced to accept a savage cut in its operations though he is thought to have done enough to convince European competition commissioner Neelie Kroes that there should be no further sale of assets in America.

RBS shares fell almost 10 per cent at one point yesterday as it revealed that the terms of the break up ordered by the EC were tougher than it had expected. The shares closed down 7.8 percent at 38.65p.

It emerged yesterday that the bank would be told to sell Sempra, a commodities trading business in the US, but Hester has resisted the divestment of Citizens Bank, now the tenth largest in the US, arguing that he has already produced plans to downsize the group's balance sheet by 40 per cent.

RBS and Lloyds Banking Group will today face the long-anticipated details of how they will be broken up under orders from the commission as the price for receiving state aid.

RBS – which is 70 per cent owned by the taxpayer – could have to sell branches in England and Wales, its Churchill and Direct Line insurance arm, and parts of its Global Banking and Markets investment banking business.

Lloyds is expected to announce a 13.5 billion rights issue, the biggest in British history, and will be told that the 185 Lloyds TSB Scotland branches must be offloaded along with online bank Intelligent Finance and the mortgage business Cheltenham & Gloucester.

The government hopes the sales – as well as the break-up of Northern Rock into "good" and "bad" banks confirmed last week – will tempt new entrants and create three new UK players to raise competition as the sector gradually recovers from last year's crisis.

Lloyds, which is 43.5 per cent owned by the state, will unveil a 21bn fundraising – including the rights issue – to avoid a taxpayer-backed insurance scheme for toxic debts.

The bank wants to stay out of the Asset Protection Scheme (APS) to prevent the government stake rising higher, but it is still likely to have to pay the government a reported 2.5bn for the implicit guarantee provided by the state since March.

RBS is expected to place around 280bn in bad loans into the APS, taking the government's stake to 84 per cent. The Treasury could pump in 20bn extra into the bank in return for the shares.

The bank, which was crippled by its takeover of Dutch rival ABN Amro, made UK record losses of 24.1bn in 2008.

Today's expected announcement will provide further evidence that Brussels is taking a hard line with banks who took state aid, after imposing big changes on Dutch bancassurer ING Group last week.

Analysts at Cazenove said: "In our view, it appears that the authorities are intent on imposing tougher sanctions on RBS."

Of those potential new entrants to banking, Virgin Group president Sir Richard Branson said he is interested in looking at the assets of three British banks which are to be privatised.

Tesco, as well as overseas banks Santander and National Australia Bank, are also possible suitors, though there may be limits on banks with an existing presence in the UK market.

The deal is likely to see the taxpayers' stake in RBS rise to 84 per cent from 70 per cent.

ADAIR PLAYS DOWN GLASS STEAGALL

BRITAIN's top financial regulator warned yesterday that breaking up banks to legally separate retail banking from investment banking could increase risks.

Adair Turner, chairman of the Financial Services Authority, told an FSA conference: "The extreme narrow banking proposal is clearly doable in practical terms, a law could be passed which achieved this effect.

"But I believe it could fail to address the most vital problem and could produce a financial system even more vulnerable to instability than the one we have today."

Turner's comments come amid some calls for a "new Glass Steagall" – the American legislation, since repealed, that separated retail and investment banking in the United States in the wake of the Wall Street crash.

Supporters include Mervyn King, governor of the Bank of England.

However, the FSA chief said the split of such activities merited serious debate. "In the years running up to the crisis, some large conglomerate banks, such as RBS in the UK, were very significantly involved in risky trading activities, which created large profits for individual traders, but large costs for ordinary taxpayers."