(AP) The taxpayer-owned Royal Bank of Scotland said Friday it will segregate about 38 billion pounds ($62 billion) of toxic assets to clean up its balance sheet in the aftermath of the financial crisis.
The move will result in a charge of between 4 billion pounds and 4.5 billion pounds in the fourth quarter news that caused shares to slump 5.4 percent to 346.7 pence.
The decision comes with the support of the U.K government, which had reviewed the possibility of creating a separate entity to manage the assets. The government concluded that spinning off a so-called 'bad bank' would do more harm than good, in part because it would distract management at a crucial moment.
Instead, RBS will create an "internal bad bank," meaning it will segregate high-risk assets and manage them separately from the rest of the bank. The goal is to dispose of 55 percent to 70 percent of these assets by the end of 2016.
"While there is inevitable uncertainty associated with running down such assets, we have a clear aspiration to remove all these assets from the balance sheet in three years," Chief Executive Ross McEwan said in a statement.
Treasury chief George Osborne acknowledged that the time frame for winding down the assets means it is unlikely the government will sell its stake before the next election in 2015. RBS is more than 80 percent taxpayer-owned after receiving a 45 billion-pound bailout in 2008, and returning it to private ownership would have been a significant victory for the Conservative-led coalition.
"I wouldn't feel comfortable going to the British people and saying 'Invest in RBS' until I was absolutely clear that it was on top of its problems," Osborne told the BBC.
Ian Gordon, an analyst at Investec, offered a note of enthusiasm for McEwan's leadership, but summed up the market's reaction succinctly. "Any relief at the avoidance of a full break-up is tempered by significant shareholder value destruction in measures announced today," he wrote in a note to clients.
RBS also said Friday that it would accelerate the divestment of Citizens, its American banking subsidiary, planning an initial public offering for 2014. It made the announcement in its earnings report, which showed third-quarter net loss narrowed to 828 million pounds from 1.4 billion in the same period last year.
It also reportedly suspended two traders in its foreign exchange arm amid an international investigation into the manipulation of currency markets.