RBS to keep ‘bad bank’ internal

RBS’s reported Q3 loss of £634 million has been somewhat overshadowed by the news that it will not be stripping off bad assets to create an external ‘bad bank’.

The relationship between the government and the Royal Bank of Scotland appears to have been heated from time to time over the last couple of years. Politics and business are not always easy bedfellows, and it would appear that finding a plan that the Bank of England (BoE), the chancellor and RBS can all agree on has taken some time.

RBS will aim to have run down between 55-70% of its bad assets by 2015, and 100% by 2016. This is an ambitious plan and is likely to see some heavy losses incurred in quarterly figures for the next couple of years. The fourth quarter could well see the bank report losses of between £4 billion and £4.5 billion. The bank is well placed as far as Basel III requirements are concerned and by 2015 expects to have a core capital ratio of 11%.

CEO Ross McEwan has hinted that the bank will now be better placed to focus on day-to-day issues, such as improving its retail arm and increasing its lending to medium to small businesses, now that it will spend less time in discussions with George Osborne and the BoE.  

So where do these changes leave investors? In the short- to medium-term there will be a lot of losses that are unlikely to do the share price any good, but longer term this could help the bank get into better shape. Things are going to get worse before they get better. 

RBS chart

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