RBS plans to refocus on retail as part of overhaul

Royal Bank of Scotland is preparing to sweep away a litany of past problems with a drastic plan to clear out bad loans, overhaul business lending and refocus on its UK retail and commercial business.

The bank, which collapsed in 2008 and is still mostly state-owned, is set to outline a plan on Friday to siphon off tens of billions of pounds of its riskiest assets including Irish property and commercial real estate loans.

The assets will be put into an internally managed "bad" bank as part of its efforts to clean its balance sheet and pave the way for a return to private ownership.

New chief executive Ross McEwan, who took over in late September, is expected to signal a repositioning of RBS's traditional UK retail and business lending back to the core of its operations.

The bank is likely to indicate it is pulling back from its overseas operations and will accelerate plans to sell its US arm, Citizens. Bankers also expect details of a significant shrinking of RBS's investment banking arm.

"It will be a cathartic day for RBS," said one person close to the bank.

The shake-up follows a four-month review of RBS by Rothschild and BlackRock, which was commissioned by George Osborne, UK chancellor, in an attempt to stimulate RBS's lending.

It also coincides with a critical report of RBS's small business lending practices by Sir Andrew Large, former deputy governor of the Bank of England. Sir Andrew's review is expected to highlight a catalogue of failures in RBS's appetite and ability to lend to these customers.

Mr Osborne will claim that the overhaul of RBS represents a "fresh start" for the bank and a decisive moment on its journey back to the private sector after five years under state control.

However, the state-owned lender has suspended two traders in connection with an intensifying global probe into the possible manipulation of the $5tn a day foreign exchange market, according to two people familiar with the matter.

The traders would be the first RBS employees to be suspended in a widening probe that echoes the Libor interbank lending manipulation scandal.

RBS, which declined to comment, confirmed this month that it had received requests for information from regulators. It comes after three senior traders at Citigroup, JPMorgan and Standard Chartered were put on leave in recent weeks.

RBS is due to publish its third-quarter results, which analysts expect to show a pre-tax profit of about £440m, compared with a £1.3bn loss a year earlier when the bank suffered a big hit from a revaluation of its own credit.

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The shares closed flat at 367.6p on Thursday, significantly below the 500p average price paid by the government for its stake.

Mr Osborne is expected to stop short of the more dramatic option to formally split RBS by taking its most toxic assets into state control. Investors, analysts and business leaders have warned that this risked destroying value in the bank and delaying its reprivatisation by several years.

John Cridland, head of the CBI employers federation, said an internal bad bank within RBS was better than the upheaval of a full split of the bank, which he claimed would create "a hell of an opportunity cost with little net benefit".

Meanwhile, Ian Gordon, an analyst at Investec Securities, warned that a full-blown split could send RBS's shares plummeting almost 20 per cent to below £3.

Instead the chancellor's main focus will be on how the remodelled bank can play a fuller role in supporting the UK's economic recovery, with a new focus on small business lending and traditional retail banking.

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