Royal Bank of Scotland has transferred more than £10bn of non-core commercial real estate loans to its new internal bad bank, RBS Capital Resolution (RCR), which is targeted for an accelerated run-down over the next three years through asset and loan portfolio sales.
The legacy commercial property loan exposure is part of a wider £19.3bn overall remaining non-core exposure to the asset class, with the £10bn balance remaining part of the main recovering bank division, although adopting a similar accelerated run-down strategy.
RCR was set up on 1 January 2014 following Rothschild’s advice to HM Treasury that an internal bad bank should be established to expedite RBS’s de-leveraging and re-privatisation.
Assets and loans transferred to RCR were due to their “particularly high capital intensity or potentially volatile outcomes in stressed environments”, with the accelerated run-down aiming to free up capital for the bank.
RCR’s target is a reduction of its entire £29bn assets to less than £6bn within three years including “a strong pipeline in the early months of 2014”, including the just-launched sale of the €850m Project Button Irish commercial estate loan book.
If RCR de-leveraged proportionally, this would imply a reduction of CRE exposure to less than £2bn by the end of 2016.
RBS’s overall core and non-core property exposure – including loans to housebuilders and development loans – fell by £10.4bn over 2013 to £52.6bn, driven by a reduction of £9.06bn of the state-owned bank’s performing loans.
This combined £52.6bn commercial property loan book is comprised of £33.3bn in core and £19.3bn in non-core, with the latter reducing by £7.04bn over 2013 through a combination of loan repayments, asset sales and write-offs.
The year-on-year run down by geography of real estate is as follows:
- UK (excluding Northern Ireland): £9.55bn to £5.48bn – a £4.07bn fall
- Republic of Ireland and NI: £10.04bn to £9.44bn – a £0.6bn fall
- Western Europe: £5.99bn to £4.05bn – a £1.94bn fall
- US: £528m to £326m – a £202m fall
- Rest of World: £260m to £28m – a £232m fall
RBS has significantly increased its non-core real estate loan provisioning levels over 2013 – £10.6bn is held against £19.3bn, compared to £8.3bn against £26.4bn.
Core and non-core LTV profile of loan book
RBS’s non-performing commercial real estate loans (NPLs) only fell by £1.4bn to £21.75bn last year, including £12.6bn of NPLs in Ulster Bank.
Ulster Bank’s overall commercial property loan book fell by £1bn to £14.3bn last year, of which, £7.1bn worth of non-performing loans carry an LTV above 150%.
Overall, RBS’s Ulster Bank subsidiary includes £8.5bn worth of loans above 100%, which is fractionally under 60% of the entire £14.3bn division’s loan book.
Across the entire group, RBS has £13.5bn worth of non-performing commercial property loans above 100% LTV, reflecting 62.1% of its £21.75bn non-performing book.
In total, RBS is carrying £15.73bn of commercial property loans above 100% LTV, reflecting 29.9% of the bank’s entire £52.6bn performing and non-performing loan book and a year-on-year fall of £3.6bn in underwater loans.
In respect of the LTV profile of its commercial property loan book, RBS wrote in its annual results this morning: “Valuations continued to be affected by difficult, although improving, market conditions, as well as refinements to the group’s estimation approach.”
RBS’s Global Restructuring Group allegations
Last year RBS faced a renewed wave of attention surrounding the legalities of its loan enforcement procedures, specifically within its Global Restructuring Group (GRG) division, with claims the bank was culpable of “systematic and institutional” behaviour in artificially distressing otherwise viable businesses.
In its annual results this morning, RBS rebutted the legal challenges, stating: “No evidence has been provided for that allegation but it has, nevertheless, done serious damage to RBS’s reputation.
“That is why we instructed the law firm Clifford Chance to conduct an independent review. This is an area where all banks routinely make difficult judgments, and indeed the banking sector has been criticised for excessive forbearance in recent years, charged with supporting unviable ‘zombie’ companies for too long.
“Issues like this continue to underscore the important role played by culture and values in enabling us to become the trusted bank we aspire to be. The board fully supports the new values we launched in 2013, and it is vital that we continue to set the tone from the top in the coming year to drive essential cultural change.”