Handing £750 million to your rivals to help them compete against you is not generally regarded as best business practice. But for Royal Bank of Scotland, it's a far more appealing prospect than pressing ahead with the seemingly impossible task of selling off a chunk of its branch network.
Offloading 300 or so bank branches should, on the surface, be simple enough to achieve. But RBS has been attempting to carve out the network, to be known as Williams & Glyn, for eight long years, at a cost of £1.8 billion – and counting.
As RBS is still 72 per cent owned by the British government, that's largely taxpayers' cash. The requirement to sell the branches dates back to the £45 billion bailout of the bank at the height of the financial crisis, and was imposed by Brussels in order to comply with European state aid rules.
Offloading the branch network would, the European Commission said, help generate much needed competition in the UK banking sector.
But separating the branches from RBS’s existing network has proved almost impossible, largely because of technical difficulties with the bank’s antiquated IT systems. A plan to float the business was abandoned along the way, as was a potential sale to Santander.
Thousands of staff were drafted in to work on the ill-fated project, as the bank rushed to meet the commission’s December 2017 deadline. Even if RBS were to press on with the project, there’s no chance now that the deadline would be met.
Ross McEwan, who took over as RBS chief executive in 2013, has described the Williams & Glyn separation process as “the most incredibly complex project I’ve seen in banking anywhere in the world”.
Torturous process
And it’s certainly not cheap – which is why shares in the bailed out bank jumped 7 per cent on news that it may finally be able to abandon the torturous divestment process.
The European Commission still needs to approve the UK treasury’s alternative plan. The proposals include setting up an independent fund to aid challenger banks, which will also be given “dowries” to help them encourage small businesses to switch their accounts from RBS. Business customers of challenger banks will also be allowed access to the RBS branch network.
It’s possible that RBS may have to do more to win agreement from Brussels and the challenger banks will also be canvassed for their views on the plan. But, assuming agreement is forthcoming, the abandonment of the shambolic divestment process will be a significant milestone for the group in its long road to recovery.
It still has a way to go, however. The legacy of the financial crisis will be very much in evidence on Friday when RBS rounds off the bank reporting season by unveiling its ninth consecutive year of losses.
Even before the £750 million Williams & Glyn provision, which will be included in the 2016 figures, analysts were predicting RBS would be in the red to the tune of £5 billion or more, taking its total losses since the bailout to an astonishing £55 billion-plus.
That includes the £24 billion loss it suffered in 2008, which remains by far the biggest corporate loss in British history. The results will be accompanied by yet another cost-cutting plan, involving further branch closures and job losses.
A solution to the Williams & Glyn problem may be in sight, but there remain a number of obstacles for the bank to overcome before it can fully shake off the toxic legacy of the financial crisis.
US sanctions
It has yet to pay the price for mis-selling residential mortgage-backed securities in the United States. Sanctions are expected soon and, in January, RBS set aside a further $3.8 billion to deal with the issue, taking its total provision to $8.3 billion. As McEwan said then, “this is a very large number”.
It’s possible, though, that the US authorities may want more, perhaps up to $13 billion, which would further delay the bank’s return to profitability.
Then there's the UK government's 72 per cent stake, which chancellor Philip Hammond recently ruled out offloading any time soon, instead saying it was now regarded as a "long term asset".
The government paid an average of 502p for the shares – almost double the current price, even after Monday’s 7 per cent jump.
There are also the Bank of England stress tests to negotiate later this year but, for shareholders who have gone without payouts for 10 years, the real return to financial health at RBS will be the day it returns to the dividend lists. If all goes well, this could be on the cards for early 2018.
Fiona Walsh is business editor of theguardian.com
