The Treasury has today kicked off a speedy beauty parade to appoint external advisers to aid Chancellor George Osborne’s commissioned review into splitting up RBS into a good and bad bank, in a divisive policy which has been described as value-destructive for the British taxpayer.
Following last night’s annual Chancellor Mansion House speech, in which Osborne adopted a Parliamentary Commission on Banking Standards recommendation, published yesterday morning, to consider a ‘good bank / bad bank’ split of RBS, the process is already underway to recruit likely multiple advisors through the government procurement framework.
The Treasury, which will lead the review into the potential creation of an RBS bad bank transferring up to between £100bn and £120bn of RBS total funded assets, is expected to appoint multiple advisers, with the likely candidates among the global accountancy and professional advisory firms and major global investment banks.
At the top end, a £120bn RBS bad bank would account for around 15% of the bailout bank’s total funded assets. Of this, around £105bn is expected to include RBS’ UK commercial real estate exposure, as well as Ulster Bank’s impaired assets including around £15.3bn in commercial real estate lending.
The Parliamentary Commission on Banking Standards stipulated that the findings of this review should be returned to the Treasury in September.
Osborne’s decision to launch a review into a RBS bad bank split – which will be determined with a sharp focus on RBS’ UK commercial real estate loans and Ulster Bank assets – re-opens a national debate over the fate of the taxpayer-owned bank, which Investec Bank’s banking analyst Ian Gordon robustly criticised in a note published this morning.
Gordon wrote: “Chancellor Osborne has missed a great opportunity to kill such value-destructive talk stone dead. Instead, any hope of a near-term sell-down of (part of) the Government’s 81% stake is, and poor RBS appears set to remain a political football – still exposed to the risk of yet further costly ‘rolling restructuring’ which benefits no-one at all.
“We regard the government’s policy in relation to RBS as misguided. The opportunity was missed to commence a sell-down of the government’s stake at 576p in August 2010, or at 352p last month, or 323p yesterday morning.”
Osborne said last night: “I can tell you today that we will urgently investigate the case for taking the bad assets – those mistakes of the past – out of RBS.
“The review will be swift. It will be conducted by the Treasury with external professional support.
“With hindsight, I think splitting RBS into a good bank and a bad bank was probably what should have happened in 2008. That is with hindsight.
“I wasn’t in office. I didn’t suggest it in opposition. And I’m not criticising my predecessor who had to act quickly in a desperate situation.”
In fact, Osborne has previously indicated little enthusiasm for a bad bank split, with this decision, timed just one week after the premature departure of CEO, Stephen Hester, for which there remains a strong suspicion of the Treasury’s influence.
“We’re not prepared to put more taxpayer capital into RBS as part of this process,” continued Osborne last night. “We will establish a bad bank if it meets our three objectives: if it supports the British economy; if it’s in the interests of taxpayers – and if it accelerates the return to private ownership.
“But if the review reveals that it would not achieve these things, then we won’t do it.”
Weighing up cost, complexity and time
At the heart of the commissioned review into splitting up RBS, will be an assessment as to whether a purely good bank of RBS would result in a greater capacity to support the UK economy through lending to SMEs and deliver a recovery on taxpayer’s £45bn 2008 bailout.
This, of course, can only be determined in hindsight once there is full sight of three major variables which mitigate the benefits: cost, complexity and time.
No doubt, the review will be seeking to answer some searching questions, in which a lack of information, to a large extent, will guide them, such as:
- To what extent will the costs of further restructuring of RBS erode the potential increased value created by extracting the bank’s toxic assets?
- Indeed, to what extent would a good RBS bank increase institutional interest in buying a stake in the bank, and how can that price be compared to the competition which would exist for a retained whole RBS bank?
- How would the restructuring costs of bad bank be borne in light of the Chancellor’s insistence last night that “we’re not prepared to put more taxpayer capital into RBS as part of this process”?
Osborne also said last night that the review would “look at a broad range of RBS’s assets, but particularly assets in Ulster Bank and UK commercial real estate”.
RBS global real estate loan book was £112.98bn at the end of 2008, three months after its government bailout, the following year this exposure fell by £9.24bn to £103.74bn and was for the first time split by core and non-core – at £57.07bn and £46.66bn, respectively.
In the four years from when RBS set up its non-core divisional reporting – from the year end 2008 to 2012 – the bank has so far de-leveraged by £40.76bn across its non-core global CRE loan book.
Against this £40.76bn exposure, RBS has taken an aggregate £12.28bn in loan impairment losses over the last four years – comprised of £1.7bn in 2012, £3.4bn in 2011, £4.6bn in 2010 and £2.58bn in 2009, according to the bank’s annual results since 2009.
This £12.28bn in impairment write-downs reflects 30% of the four-year de-leveraging total.
RBS now forecasts that by the end of this year, only a rump of £14.8bn in non-core commercial real estate loans will remain – comprised of circa £6.6bn in UK loans, £4.4bn in legacy Ulster Bank loans and around £3.7bn its remaining global real estate exposures.
Already in the first quarter, RBS has shed a combined £1.68bn in core and non-core real estate exposure.
If the bank’s end of year de-leveraging target is achieved, RBS will have shed £48bn in non-core real estate in five years – from £62.8bn at the end of 2008, to around £14.8bn by the end of 2013.
However, the Treasury’s review into breaking up the bank is likely to be considering RBS’ combined core and non-core exposure, and may look to transfer a wider pool of real estate loans that RBS currently defines by its end of year targeted £14.8bn.
At the end of March, RBS global real estate exposure was £70.54bn, comprised as follows:
- £27.01bn in non-core, of which £19.98bn are currently classified as impaired, reflecting 73.9% of the total non-core real estate book;
- £43.46bn in core, of which £18.28bn are currently classified as impaired, reflecting 42.0% of the total core real estate book;
- In aggregate, £38.27bn worth of loans in RBS’ £70.54bn combined real estate exposure are impaired, reflecting 54.3% of the bank’s total real estate book.
The Treasury, and its advisers, no doubt, are likely to be contemplating a transfer of much wider pool of real estate loans than RBS currently categorises as non-core – possibly as much as the entire £38.27bn impaired pool or, indeed, a greater proportion still including loans that are not yet impaired but are expected to become so.
RBS commercial real estate exposure within its Ulster Bank subsidiary has only fallen by a modest £1.7bn in the four years since the end of 2008 to 2012 – from £17bn, at the end of 2008, to £15.3bn at the end of March.
Ulster Bank’s non-core real estate exposure comprises £11bn, of which, £10.48bn worth of loans are impaired.
RBS has only made £6.41bn worth of provisions against this £10.48bn impaired development and investment real estate lending pool, which may prove insufficient as the bank seeks to migrate to a passive longer term asset management as part of its current proposals from next year.
The extent to which RBS capital is constrained by provisioning requirements, as well as Basel III and slotting requirements, is another focus of the RBS bad bank debate.
RBS insists that its capital reserves against impaired legacy loans are not restricting its ability to lend to the UK SME market, which include property companies, and that its current lending levels are demand-led.
The Treasury review into RBS will likely seek to determine to what extent this is true: specifically, whether a good RBS bank be able to lend more, removed of these legacy restraints and the associated capital tied up to meet more stringent regulatory requirements.
However this unfolds from here, a swift even partial re-privatisation would likely be on ice in the event of the government establishing an RBS bad bank.