RBS shares lose 7% after it decides against 'bad bank' split

Royal Bank of Scotland shares have lost 7.5% following news the 81% state-owned bank will not split itself into separate so-called good and bad banks.

RBS will create an internal "bad bank", ring-fencing £38bn of poor quality assets, such as loans it does not expect to see repaid.

However, some have questioned whether RBS would have been better splitting off its bad assets.

RBS also launched a review of how it treats its customers.

One leading figure who will look hard at the ring-fence plan is the Conservative MP Andrew Tyrie , who chairs the Treasury Committee and presided over a report this summer that recommended that the government should look in detail at the case for splitting the good and bad assets.

He told the BBC's World at One programme he would be looking into the reasoning behind the government's decision.

"The question... is whether this restructuring is enough to turn RBS round in reasonable time. I hope so but I remain concerned that it might not," he said.

RBS's shares were among the heaviest fallers on the FTSE 100 share index in Friday trading, down more than 7% at 340p.

'Honest'

RBS's chief executive, Ross McEwan, said he was pleased to end the good bank/bad bank debate because "the uncertainty had hung over the business for far too long" and had taken up too much management time.

Chancellor George Osborne told the BBC's Today programme that RBS had been "painfully honest" about how weak a bank it was, and that the decision to create an internal bad bank "would make it easier to sell off the bank and get our money back".

In an implicit criticism of the previous boss Mr Hester, he also said that for the first time the government, the Bank of England and RBS were in agreement about where the bank was heading.

Shadow chancellor Ed Balls said the test for these changes would be "whether the taxpayer ultimately gets its money back and whether they actually boost business lending".

In all, three separate reports relating to RBS were released on Friday: the company's own third quarter results report, a report into its small business lending practices by Sir Andrew Large, and the one commissioned by the government into whether or not to spilt the bank into two.

The main points from the reports include:

• No split into "good" or "bad" bank

• Fencing off £38bn of bad quality assets within the bank to be then sold off

• Speeding up of the sale of US subsidiary Citizens

• Poor performance in lending to small businesses

• Poor performance in serving individual customers - review launched

• Another £250m set aside for mis-selling payment protection insurance (PPI)

• Bottom-line loss of £634m for three months to end September

• No plans to reduce 81% government stake in business - yet

Toxic

The decision to keep the bad assets within the bank, but ring-fenced and managed separately, goes against the guidance of the Parliamentary Commission on Banking Standards, which this summer said there was a case for removing toxic loans from RBS and keeping it in the public sector for the foreseeable future.

Toxic loans - or assets - include loans and mortgages that are not expected to be repaid, as well as more complex investments related to these bad loans.

RBS said it would make a heavy loss this year partly because it plans to sell the assets - the bad loans - held by the internal bad bank, more quickly than originally planned.

It will sell up to 70% of these within two years, which will contain about £9bn of assets from Ulster Bank.

RBS said that it would take a charge of £4bn-£4.5bn in the current quarter to cover the losses on the loans.

The sale of its American bank Citizens will also be brought forward with a partial flotation planned for next year.

The Bank of England said that it welcomed the plans for RBS's future structure, saying: "These actions should create a more resilient institution that is better able to support the real economy without any expectation of further government support."

Small businesses

The report on RBS's small business lending said the bank was performing so badly in that area it was not even meeting its own targets for the sector.

The bank says it will write to "thousands more businesses setting out how much more the bank is willing to lend them [and] cutting the length of time that loan applications can take".

RBS's review into how it serves its individual customers is scheduled to report its conclusions early next year.

Like its fellow banks, RBS has been caught up in the mis-selling of payment protection insurance (PPI) - cover customers either did not need or did not qualify to use - and other banking scandals.

In a separate development just ahead of the results, RBS suspended two traders in connection with an investigation into the possible manipulation of foreign exchange rates.

Earlier this year, RBS was fined hundreds of millions of pounds for its involvement in rigging Libor interest rates.

The future of Ulster Bank, an important lender in both Northern Ireland and the Republic of Ireland, will be decided in the customer review, which as well as service standards will look at its costs.

Mr McEwan, who took over as the bank's chief executive from Stephen Hester in September, refused to say whether this could lead to job cuts.

Privatisation

RBS is still 81%-owned by the taxpayer, but unlike Lloyds, in which part of the taxpayer's stake was sold recently, there are no immediate plans to reduce that investment.

The BBC's business editor, Robert Peston, says the first stages of privatisation are unlikely to take place until after the 2015 general election.

The government bought the shares at the height of the financial crisis at just over 500p a share, well above the current value of around 360p.

Ian Gordon, from Investec, said the moves announced would do little to help bring the share price back up to break-even level for the government.

"A dreadful day for RBS as political expediency overrides shareholders' best interests," he said.

"Any relief at the avoidance of a full break-up is tempered by significant shareholder value destruction in measures announced today."

RBS's pre-tax loss of £634m for the three months to 30 September took into account a number of one-off charges, including the extra £250m for PPI mis-selling.

Group operating profits for the quarter fell to £438m, down from £909m a year earlier.