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RBS split unlikely - analyst
By Darshini Shah | Thu, 7th March 2013 - 11:34
Royal Bank of Scotland (RBS) was deemed to be worth "less than thought" by Bank of England governor Sir Mervyn King.
Speaking to the Banking Standards Commission on Wednesday, Sir Mervyn stressed there was a "good bank, bad bank" within bailed-out RBS, adding that there were "powerful" arguments for splitting up the bank "sooner rather than later".
"The whole idea of a bank being 82%-owned by the taxpayer, run at arms' length from the government, is nonsense," he said. "It cannot make any sense.
"I think it would be much better to accept that it should have been a temporary period of ownership only, to restructure the bank and put it back. The longer this has gone on the more difficult that's become."
He went on to say there was a need to find a way to create a new RBS that could be a "major lender" to the UK economy.
Ian Gordon, analyst at Investec, regarded this "slightly ambitious", but also noted that RBS intended to grow core lending by 3% in 2013, in contrast to Lloyds Banking Group (LLOY), which remained committed to ongoing core shrinkage in the first half of 2013.
Sir Mervyn pointed out: "It's four-and-a-half years on (since RBS's rescue) and there is no immediate sign of it going back to the private sector." This contradicted comments by RBS chief executive Stephen Hester, who recently insisted that the bank's return to the private sector was on track and could be completed within two years.
"So I think that means that we have not been sufficiently decisive in either recapitalising the banks or restructuring them," Sir Mervyn added.
Bank account disruption
The comments were made just hours before customers at RBS and subsidiary NatWest began reporting problems with online and phone banking, cash withdrawals and debit card payments.
It is the second time in nine months technical problems have hit the group. Last summer, millions of customers were unable to move money or pay bills for days after a software update went wrong.
RBS said it would now consider compensating customers for any problems encountered. Last time, the bank set aside £100 million to compensate customers, as well as extending its branch opening hours.
Last year's failures were widely attributed to a decision by RBS to outsource its IT department to India, resulting in the loss of 1,600 skilled UK jobs. As the failures continued for a week, questions were asked about whether RBS was in fact facing a crisis of liquidity, forcing Sir Mervyn to publicly comment on the issue.
"What is for certain is that RBS customers, already seething from news of Libor fines, bonuses, and last year's meltdown, will not be as forgiving a second time around. People are already saying they will move their money," stated Laura Willoughby of Move Your Money.
"Stephen Hester may be cursing bad luck, but once again this points at major operational and customer service failings at RBS. He promised this would not happen again."
Sell RBS, buy Standard Chartered?
At the end of 2008, RBS's balance sheet needed more restructuring than perhaps any other bank in the world. It is to the management's great credit that this task is nearly complete, and has been achieved with a speed and at a cost that looked very unlikely a few years ago, despite the eurozone crisis making the economic backdrop much tougher than expected.
"But as the balance sheet is increasingly fixed, so investor attention moves towards the core businesses, and here the news is less good," pointed out James Invine, analyst at Societe Generale. "RBS Core (the ongoing businesses) generated 10% return on equity last year, much lower than the 16% we forecast for Lloyds Banking Group.
"Admittedly, this rises to 12% if we exclude the troublesome Irish unit - but we believe that to be a false distinction as Ulster is a continuing business and one for which there is no quick fix."
He acknowledged changes to the group's corporate structure could provide catalysts, but stressed they were a long way off: "The US retail business will take two years to float, while the simplification of the government's shareholding and preferential dividend rights (which effectively block ordinary dividends) is now said to be likely be a 2014 event rather than the previous suggestions of the second half of 2013."
Marc Kimsey, senior trader at Accendo Markets, advised investors to buy Standard Chartered (STAN) instead, calling the bank "solid, reliable [and] predictable".
"Steady consumer banking income, China and Africa chipping in with over $1 billion (£0.6 billion) of income, dividend increased by 10% - a refreshing report following the horror shows from RBS and Lloyds.
"Standard Chartered should be the cornerstone of any long-term portfolio."