RBS's Williams & Glyn Unit Gains Importance as Dividend Obstacle

  • Regulators want sale or spinoff before allowing RBS payout
  • Lender must sell consumer bank unit by 2017 by EU rules

Royal Bank of Scotland Group Plc’s forced sale of its Williams & Glyn consumer bank has been a headache for six years. Now it’s moving to front of mind.

The 300-branch division, which RBS has been working to divest since 2010 has become a potential roadblock to the lender’s resumption of dividend payments. The Bank of England’s Prudential Regulation Authority is “very interested in us removing” Williams & Glyn before it allows RBS to return capital to shareholders, Chief Executive Officer Ross McEwan told analysts on a call Friday. 

The U.K.’s biggest government-owned lender had previously guided investors to consider its progress in reaching a settlement with U.S. authorities over sales of mortgage-backed securities, hitting restructuring targets and the passing of BOE stress tests this year as the key milestones it needs to pass before returning capital. Williams & Glyn, which RBS must sell by the end of 2017 to meet European Union state-aid rules related to its 45.5 billion-pound ($63 billion) bailout in the financial crisis, is now an additional obstacle.

Longer List

“It’s added to the list, and we don’t quite know why, as it’s very small in the context of risk-weighted assets and available capital,” said Joseph Dickerson, an analyst at Jefferies International Ltd. in London with a buy rating on the shares. “The PRA won’t want them to bump up against the deadline, so I suppose they see that as a more immediate priority than distributing capital.”

RBS on Friday cited the disposal of Williams & Glyn, which comprises about 2 percent of the bank’s assets, as one reason behind the bank’s expectation that it probably won’t resume shareholder payouts until after the first quarter of 2017, later than originally planned. The bank also reported its eighth consecutive annual loss, driven by costs for misconduct, causing shares to plunge.

RBS isn’t holding a formal sales process for the unit yet, Chief Financial Officer Ewen Stevenson said at a meeting with reporters Friday, and it’s also continuing preparations for an initial public offering of Williams & Glyn in case a deal doesn’t materialize. In December it said it would sound out potential buyers after receiving a number of approaches.

Bid Interest?

Among interested parties are Spain’s Banco Santander SA and Virgin Money Holdings UK Plc, Sky News has reported. Secure Trust Bank Plc Plc, led by former RBS banker Paul Lynam, is also mulling an offer, according to the Sunday Times. The unit could be valued at about 1.5 billion pounds, a person familiar with the matter said last year.

RBS has faced several delays in disposing of Williams & Glyn, which reported an operating profit of 431 million pounds for 2015. The company planned to sell the unit to Santander, in a deal which collapsed in October 2012, with the Spanish bank citing completion delays. RBS has also pushed back the date by which it wants to run Williams & Glyn as a standalone unit from this summer to after the first quarter of 2017.

Williams & Glyn, which focuses on commercial lending and retail checking accounts, is consuming the effort of more than 5,000 staff at RBS to separate. The company is working on about 60,000 separate project items to split out a fresh computer system, using its own technology as a base for about 190 products, McEwan told analysts on the call. About 400 out of 700 systems have been tested and will be up and running this year, he said.

“The board is very focused on this,” Chairman Howard Davies said, referring to the divestment. “We have a deadline but also we have to do this safely. We can’t possibly envisage a situation where two million customers get lost in translation.”

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