Royal Bank of Scotland Group plc Opts Against ‘Good Bank/Bad Bank’ Split

Shares in Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) slid by 4% in early trade this morning, after the group opted against dividing itself into a ‘good bank’ and a ‘bad bank’.

Instead, it will ring-fence £38bn worth of high-risk assets — 20% of the bank’s capital — in a newly created internal ‘bad bank’ by the end of this year, with a goal of removing 55-70% of the bad loans and suchlike over the next two years, and possibly all of them within three years.

However,  this will have a knock-on effect onto Q4, with impairments expected to increase to £4bn-£4.5bn, resulting in a likely “substantial loss for the year” according to management.

One aim of avoiding the split appears to be to bolster RBS’s image, proving that management are able to clear the bad assets internally, and eventually return to a high level of customer confidence, as chief executive Ross McEwan commented:

“The actions we are announcing today, when complete, will create a less complex, more effective customer business capable of delivering returns that will be attractive to prospective shareholders. They will create a bank that can reward the faith of UK taxpayers and all our investors.”

The news was delivered alongside RBS’s Q3 results, which reported a 6% increase in core operating profit against Q2 2013, but the figure of £1.28bn is still 14% less than the comparative period in 2012. Total pre-tax loss for Q3 2013 came in at £634m.

Management went on to say:

“We see signs that the UK economic recovery is gaining traction and have observed higher levels of activity and confidence among our customers. Nevertheless, we expect a continued muted performance from our core businesses in the short term, due primarily to the continued effects of low interest rates, excess liquidity, a smaller balance sheet, and lower securities gains from our liquidity portfolio.

“We expect Markets performance in Q4 2013 to reflect normal seasonal trends. Our strategic review will start to drive cost reductions and improve efficiencies from our core businesses during 2014 but will take two to three years to embed.”

Elsewhere, the bank is planning a review of its customer focus, aiming to improve the bank’s performance and effectiveness in serving its customers, shareholders and wider stakeholders.

Finally, McEwan also stated that the bank was in advance discussions over the removal of a special government share that has stopped the lender paying dividends.

So today’s slide in the share price may offer an opportunity if you believe in RBS’s management and have the patience to see the bank’s plan to remove that £38bn pile of bad assets from its books, with hints at a returning dividend to boot.

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> Sam does not own shares in RBS.