RBS Under Pressure to Shrink, Prepare for Sale

Royal Bank of Scotland Group Plc Chief Executive Officer Stephen Hester is being pressed by the U.K. government to sell more assets and bolster capital as the Treasury tries to recoup some of its 45.5 billion-pound ($68.9 billion) investment in the bailed-out lender.

RBS will this week announce plans to sell a stake in Citizens Financial Group Inc. and shrink assets at its investment-bank by as much as 30 billion pounds, said a person with knowledge of the plans, who asked not to be identified because the matter is private. As recently as August, Hester said he didn’t intend to sell the U.S. consumer and commercial lender it acquired in 1988.

“RBS is clearly under pressure from the government to shrink and make the bank much simpler,” said Ian Gordon, an analyst at Investec Plc in London, who values Citizens at about 8 billion pounds and has a sell rating on the stock. “Regulators seem to be saying that RBS needs to raise capital.”

Hester, 52, has cut assets by more than 800 billion pounds, eliminated 36,000 jobs and scaled back RBS’s securities unit since he took over from Fred Goodwin in 2008. The shares are still little more than half the price the government paid for its 81 percent stake when it rescued RBS during the financial crisis, the biggest bank bailout ever.

Post Loss

The lender will post a net loss of 5.16 billion pounds for 2012, compared with a loss of 2 billion pounds a year earlier, according to the median estimate of nine analysts in a Bloomberg survey. RBS is scheduled to announce full-year earnings on Feb. 28.

RBS’s shares have risen 6 percent this year to 344 pence as of 9:36 a.m. in London. The government paid the equivalent of 502 pence a share for its stake in the Edinburgh-based company.

The firm will sell a 15 percent to 25 percent holding in Citizens in a deal that may take two years to complete, the person with knowledge of the matter said. Operating profit for the U.S. consumer banking and commercial unit rose to 554 million pounds in the nine months to Sept. 30 from 360 million pounds a year earlier, according to company filings. A spokesman for RBS in Edinburgh declined to comment on a sale.

“RBS is clearly under pressure from regulators to raise capital and this shows a clear path to achieving that,” Shailesh Raikundlia, a London-based analyst at Espirito Santo Investment Bank, said in an interview. “Why else would you sell a profitable part of the business unless you had to?”

Public Shares

Chancellor of the Exchequer George Osborne is facing opposition calls to change his economic plans after Moody’s Investors Service stripped the U.K. of its Aaa status, citing the “weakness” of the economic outlook. Britain’s economy shrank 0.3 percent in the fourth quarter, leaving the country at risk of a triple-dip recession.

British Prime Minister David Cameron this month told Hester to speed up the lender’s return to health as he left open the possibility of giving the public shares in the bank.

“Obviously we want them to, where possible, accelerate the adjustments that they are making in terms of making it a strong organization,” Cameron told reporters in Mumbai on Feb. 19, during a three-day visit to India.

A full nationalization of RBS to break up the bank would face “serious, practical obstacles” and require as much as 10 billion pounds of public money, Osborne said yesterday.

U.K. Financial Investments Ltd., the steward of the government’s stake in RBS, said last year that it wrote to the lender advising it to sell its Rhode Island-based Citizens unit and scale back the securities unit more radically.

Markets Cuts

RBS last year announced plans to cut about 3,800 jobs at the investment bank and sell or close its unprofitable cash equities, mergers advisory and equity-capital markets divisions. In the first nine months of last year, the markets business accounted for about 28 percent of group operating profit at the so-called core unit.

The firm’s recovery has been hobbled by its regulatory mis-steps including a $612 million fine this month for rigging the London interbank offered rate, and more than 1.7 billion pounds earmarked to compensate customers improperly sold payment protection insurance and interest rate hedging products.

The bank will this week set aside an additional 700 million pounds to redress customers for the mis-selling of swaps and 400 million pounds for PPI, said the person.

Britain’s biggest banks have already put aside more than 12 billion pounds to customers who were forced to buy, or didn’t know they had bought PPI to cover their repayments on mortgages, credit and other loans. Lloyds Banking Group Plc will set aside an extra 1 billion pounds for PPI and a further 200 million pounds for swaps when it reports full-year earnings on March 1, Deutsche Bank AG analysts including Jason Napier wrote in a Feb. 20 note to clients.

Net Loss

Britain’s biggest mortgage lender will report a net loss of 1.14 billion pounds for 2012 compared with a loss of about 2.8 billion pounds for the previous year, according to the median estimate of 13 analysts.

Lloyds, 39 percent government owned, has so far said it’s unable to estimate the potential cost of Libor lawsuits and regulatory settlements.

Both RBS and Lloyds face uncertainty surrounding the sale of branches demanded by the European Commission as a condition of their receipt of state aid.

RBS has been forced to reopen its tender of the 316 branches it is required to sell by 2014 after Banco Santander SA, Spain’s biggest bank, abandoned its 1.7 billion-pound purchase of the branches in October.

The sale of 632 Lloyds branches to Co-Operative Bank Plc for 750 million pounds, agreed in July, has dragged on as regulators pressed Co-Op to appoint a full-time head for its lending unit amid concern the company’s managers don’t have enough banking experience to run the enlarged business. Lloyds and RBS have said they may opt instead to sell the branches via an initial public offering if the plans fall through.

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