PRESSURE on Royal Bank of Scotland to sell its insurance arm to meet fundraising targets has eased, despite the banking giant's failure to sell the Australian arm of ABN Amro, which it acquired last year.
Although RBS maintains it still plans to offload its insurance division, its successful selling off of leveraged finance debt, as well as other planned sales, has served to shore up the bank's balance sheet.
Last week, RBS unveiled record half-yea
r losses of £691 million, the worst result by a British lender since Abbey National five years ago.
Australian banking group Commonwealth Bank of Australia (CBA) yesterday pulled out of negotiations to buy ABN Amro Australia Holdings, the banking division acquired by RBS through its £71 billion three-way buyout of ABN last year.
CBA chief executive Ralph Norris cited a lack of access to funding following a spate of writedowns announced by Australian banks, including Clydesdale bank owner National Australia and ANZ Banking Group. NAB ruled itself out as a buyer of the business in July.
Yesterday, RBS said it would "retain ownership of these highly successful businesses and move to integrating them with our existing franchise in Australia and New Zealand."
Despite a still-poor economic climate for selling assets, RBS chief executive Sir Fred Goodwin maintained that the UK insurance division, which includes Direct Line and Churchill, was still up for sale, with an expected asking price of £5-7bn. However, he has assured investors the bank does not need to sell the business to meet its target for its core Tier 1 ratio, a measure of the strength of the bank's balance sheet, saying that "if (the sale] doesn't happen, it doesn't happen".
Lee Goodwin, a banking analyst with Fox-Pitt Kelton, told The Scotsman that FPK had all but ruled out the possibility RBS would sell the insurance division this year.
"Our view is they most likely won't sell the business. I think they are going through the business properly and won't reduce the price," he said.
The bank's core Tier 1 ratio is at 5.8 per cent including the proceeds of the £1bn sale of Tesco Personal Finance last month. The target is 6 per cent by the end of the year. Goodwin told analysts that other means would help reach the target including dividends in the second half and sale of other assets such as its share of Saudi Arabian bank Saudi Hollandi. This week, RBS, Fortis and Santander also sold ABN private equity assets to a consortium led by Goldman Sachs in a deal worth several hundred million euros.
This week it emerged that RBS sold off $8bn (£4bn) worth of leveraged finance debt, money the bank lent to private equity companies to make acquisitions, to a consortium at a deeply discounted rate.
Although this sort of transaction is considered by many to be controversial, Goodwin told analysts that deleveraging the balance sheets "reduces risk-rated assets which increases capital ratios".
Arch financier Jon Moulton called such transactions a "hideously complicated game", where private equity companies buy highly discounted debt on assets they own – leading eventually to a tricky legal situation if the venture capital group defaults on the debt. RBS underwrote a substantial amount of debt backing private equity deals, such as KKR's £11bn acquisition of AllianceBoots last year, at the height of the market and has since found it hard to sell on such debts since the credit crunch started to bite.
Nevertheless, Lee Goodwin said the deal presented a good opportunity for RBS to "derisk" its balance sheet as the faltering economy continues to threaten further writedowns on assets.
"They are really freeing up their balance sheet and clearly derisking the balance sheet. RBS should be applauded for getting on with it. I don't see this as a negative at all. What we have been waiting for a while is for these sorts of assets to start to get moving off balance sheets."
RBS confirmed its levels of leveraged finance had come down about £5.5bn from £14.5bn at year end.
Shares in RBS took a hammering yesterday, falling 6.4 per cent to 229.75p amid a wider market sell-off. Banks and other consumer-facing stocks suffered amid fading hopes for a quick cut in interest rates. Pressure was also heaped on banking shares by credit-crunch losses reported by UBS and JP Morgan.
The full article contains 746 words and appears in The Scotsman newspaper.
