RBS negotiating early release from costly asset protection deal

Published on Saturday 31 October 2009 13:56

ROYAL Bank of Scotland looks set to agree a deal with the government that will see it freed from the restrictions of the asset protection scheme (APS) earlier than it had originally feared.

But the bank is still likely to have to sell its insurance business to compensate for the state aid it has received. An order from the government and Europe to go ahead with the disposal of the business, which includes Direct Line and Churchill, could come as early as this week.

RBS is in the final stages of discussions with the Treasury and European competition authorities about the details of the APS. Under the new arrangement, it would no longer pay the up-front fee of up to 17.5 billion for joining the scheme for five years. Instead, it would absorb the first 60bn of losses on toxic assets, rather than the first 19.5bn as set out in the original deal. This will give RBS flexibility to leave the scheme when market conditions improve, rather than be tied in for five years.

However, the authorities are not backing down on their insistence on disposals by RBS, which is 70 per cent state owned, in return for the tax-payer support it has received and its inclusion in the APS.

Some investment banking assets may also have to be sold off. It is thought that Neelie Kroes, the European Union competition commissioner, will give RBS four years to complete the sale of the insurance division, which will raise around 5bn.

RBS was dealt a further blow this weekend when reports emerged that two executives have been suspended after alleged corruption at its overseas mortgage operation was uncovered. The bankers were allegedly asking foreign estate agents for payments worth tens of thousands of pounds in return for referring customers.

Customers from RBS subsidiaries including NatWest, Coutts and Adam & Company, are said to have been referred by the two bankers. An RBS spokesperson said: "We take any allegation of fraud very seriously and would always as a matter of course carry out a full investigation into any claims of wrongdoing."

The Treasury is also expected to decide as early as this week whether Lloyds Banking Group, which is 43 per cent state owned, will be allowed to avoid the APS. It is thought the bank will pay 2.5bn to escape the expensive scheme. Last week Chancellor Alistair Darling reportedly told Lloyds chief executive Eric Daniels that his group could test its capital-raising plans in the market and formally appoint underwriters.

RBS is unlikely to announce a fundraising imminently, but it is expected to raise fresh capital at a later date. Keith Bowman, at broker Hargreaves Lansdown, said: "RBS is bound to be watching carefully the response of the institutions closely as Lloyds is testing the water, seeing the level of support there would be for capital-raising."

Lloyds is expected to have to sell its Cheltenham & Gloucester, Lloyds TSB Scotland and Intelligent Finance brand to meet the demands of Kroes.