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Costs of carve-out expected to rocket

RBS plunges to loss after delays to Williams & Glyn disposal

RBS hqRoyal Bank of Scotland plunged to a near-£1 billion loss after paying off a government guarantee on the bail-out it received in 2009.

Excluding the one-off dividend the bank reported a profit before tax of £421m for the first quarter, up from £37m in Q1 2015.

 This fell to an attributable loss of £968m (2015: £459m) after accounting for the £1.2 billion paid to the government to retire the dividend access share which gave the Treasury first call on payouts.

It reported another quarter of strong mortgage growth with an 11.4% share of new business and the fifth consecutive quarter of lending growth in its commercial business.

Attention will focus, however, on yesterday’s admission that the plan to split off 300 branches into a new bank – Williams & Glyn – is proving difficult. It said the process will lead to ‘significantly’ higher costs.

The bank said it will not achieve the deadline for separation because of “complexities” and it is now looking at other options. It did not specify what these may be.

Its admission  that the project is behind schedule contradicts claims by chief executive Ross McEwan that the process was on track.

It also raises questions about expected returns on capital that were due to flow from the deal, and the prospect of it resuming dividend payments. Shares were down 4% down and are down by 16.5% since the turn of the year.

The European Commission ordered RBS to sell 300 branches as a condition for receiving £46 billion of state aid during the financial crisis.

RBS, still 73% owned by the government, was due to sell the branches to Santander in 2012 until the Spanish lender pulled out, blaming difficulties over IT. This seems to the cause of the current “complexities”.

Ross McEwan

Instead RBS revived the Williams & Glyn brand and hired Bank of America Merrill Lynch for an IPO. But before Christmas it said it was operating a “twin track” sale and flotation strategy after receiving a number of approaches. Santander was said to have renewed its interest.

However, there was speculation, denied by the bank, that the process had hit problems. It has now spent £1.5 billion on the separation process and questions are bound to be raised about the commercial logic of the split which will only see costs escalate.

The ability of Williams & Glyn to compete as intended as a challenger bank will be tested, given the small scale of the bank when it finally emerges. It will have half the branches that TSB had when it was carved out of Lloyds, and only 5% of the commercial banking market.

It may prompt an approach to the European Commission to reconsider its ruling.

In a statement about the delayed Williams & Glyn process, RBS said: “Since the last update provided with the 2015 annual results, we have undertaken further extensive analysis on the separation and divestment of Williams & Glyn.

“As a result of this analysis, we have concluded that there is a significant risk that the separation and divestment to which we are committed will not be achieved by 31st December 2017.

“Due to the complexities of Williams & Glyn’s customer and product mix, the programme to create a cloned banking platform continues to be very challenging and the timetable to achieve separation is uncertain.

“RBS is exploring alternative means to achieve separation and divestment. The overall financial impact on RBS is now likely to be significantly greater than previously estimated.”

Santander may return for another tilt at the branches, though the recurring IT issues may prove a deterrent. Among other possible buyers is Secure Trust Bank, a subsidiary of the Arbuthnot Banking Group which counts former Scottish Secretary Lord Forsyth as a director.

It is run by former RBS executive Paul Lynam and is a retail and commercial bank quoted on the Alternative Investment Market. It offers personal loans, savings accounts, as well as business banking products.

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