February 22, 2017 / 9:48 AM / 6 months ago

Fitch: Revised State Aid Plan Removes A Key RBS Uncertainty

(The following statement was released by the rating agency) LONDON, February 22 (Fitch) A revised plan for Royal Bank of Scotland Group (RBSG) to meet its remaining state aid obligations would remove one of the key cost challenges it faces in its restructuring strategy, Fitch Ratings says. We believe the plan, if agreed, would bring a faster and more certain conclusion to its state aid obligations than the existing requirement to sell all RBS branches in England and Wales and all NatWest branches in Scotland, referred to as Williams & Glynn (W&G). RBSG is required to fully separate and divest W&G by end-2017, as a consequence of having received state aid. However, the W&G divestment process has proven to be complex and costly and the deadline imposed by the EC will not be met. RBSG would instead deliver a package to promote competition for banking services to UK SMEs, under an alternative plan proposed by the Commissioner responsible for EU competition policy. This would include funding to help eligible challenger banks serve UK SMEs, a fund that eligible challenger banks can access to increase their business banking capabilities, funding to invest in fintech for business banking, and access to RBSG branches for the business customers of challenger banks. RBSG has taken a GBP750m provision within its 2016 results to provide for the proposed package and expects to take additional restructuring charges in 2017 and 2018 to reincorporate the W&G business into the RBS franchise. The exact workings and costs of the proposed plans are not yet clear. For example, it is unclear whether RBSG would be allowed to maintain relationships with clients that use challenger banks funded by the package. But we believe the ultimate cost to RBSG, including the impact on its franchise, is likely to be less than under the existing plan. At this preliminary stage, we expect the proposal to be credit neutral, rather than positive. RBSG's profitability is a key credit weakness and remains under significant pressure from large conduct and restructuring costs, including those related to the separation of W&G branches. The group reported an attributable loss of GBP2.5bn in 9M16, mainly due to GBP1bn of restructuring costs and GBP1.7bn of conduct costs. We expect the loss for the full year to be materially larger and for losses to be reported in 2017 and possibly into 2018, depending on when conduct liabilities are finalised. Contact: Joanna Drobnik, CFA Director +44 20 3530 1318 Fitch Ratings Limited 30 North Colonnade London E14 5GN David Prowse Senior Analyst Fitch Wire +44 20 3530 1250 (Disclosure Statement): The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. 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