Bids for insurance division close today as bank nationalised

Troubled bank RBS has today been nationalised, coinciding with the deadline set for bids for its insurance division, including Churchill and Direct Line.

Even higher losses of £8bn, announced today, may force a sale at low price.

Speculation still has the Patrick Snowball-led private equity bid as front-runner to buy the insurance division at a knock-down price. Snowball is the ex-NU boss and Towergate board member.

The government this morning converted its preference shares into ordinary shares in RBS, effectively nationalising the bank.

The Treasury issue the following statement:

With continuing instability in the global financial markets, expected to be demonstrated by a run of poor financial results from the industry, the Government is today taking action, building on the comprehensive set of measures it announced on 13 October, to adjust its commercial investments in the Royal Bank of Scotland Group plc (RBS) to stabilise further its position and ensure it has the tools to enhance its contribution to the long term strength of the economy.

The Government, in consultation with UK Financial Investments (UKFI), has today agreed to convert the Treasury's preference share investment in RBS to ordinary shares, with the aim of: supporting stability in the financial system; ensuring continued protection for ordinary savers, depositors, businesses and borrowers; and maintaining a safeguard of the interests of the taxpayer. In summary, this action is intended to:

  • make available additional core tier 1 capital to the bank to strengthen its resources, enable it to absorb expected losses and permit it to restructure its finances; and
  • give the bank the opportunity to build its capital further so that it is able to maintain and increase its support for the real economy by facilitating £6bn more lending to industry and homeowners, over and above existing commitments.

The Treasury, Bank of England and Financial Services Authority have continued their detailed discussions with the institutions that participated in the recapitalisation scheme last year. These institutions committed in aggregate to strengthen their total tier 1 capital, either through their own actions or, where requested, through additional support from the Government by increasing or restructuring the preference and ordinary share capital.

The Government is not injecting new money into RBS.

As part of its agreement, the Government has agreed with RBS commitments including:

  • the extension to large corporates of the existing agreement to maintain, over the next three years, the availability and active marketing of competitively-priced lending to homeowners and to small businesses at 2007 levels or above; and
  • increasing lending still further by £6bn in the next 12 months.

UKFI will continue to manage the Government's shareholdings in the recapitalised institutions on a commercial arms-length basis and with the aim of realising value for the taxpayer. Consistent with the Government's aim that it should not be a permanent investor in UK financial institutions, UKFI will develop and execute a strategy for disposing of the shareholdings in an orderly way.

The RBS announcement said:

  • RBS today provides a trading update ahead of the announcement of its 2008 results on 26 February 2009. The figures quoted in this statement are preliminary estimates and unaudited.
  • Credit and market conditions in the fourth quarter of 2008 were particularly challenging and RBS estimates the Group will report for full year 2008 an attributable loss, before exceptional goodwill impairments, of between £7.0bn and £8.0bn. The Group is currently reviewing the carrying value of goodwill and other purchased intangibles on its balance sheet as part of the finalisation of the year end results. Any goodwill impairments will have no effect on the Group's regulatory capital ratios, and represent non-cash items.
  • RBS estimates the Group will report break-even underlying financial performance after credit impairment losses, reflecting profitability across its retail and commercial business in the UK and elsewhere offset by losses in the Global Banking and Markets division ('GBM').
  • RBS also announces that it has reached agreement with HM Treasury ('HMT') and UK Financial Investments ('UKFI') to replace the £5bn of preference shares it holds with new ordinary shares. Eligible RBS shareholders will be able to apply to subscribe for approximately £5bn of new ordinary shares pro rata to their existing shareholdings at a fixed price of 31.75 pence per share. This represents an 8.5 per cent discount to the closing price on 16 January 2009. These new ordinary shares will be offered to shareholders and new investors on the same basis as the Offer in November 2008. The ordinary shares offer is fully underwritten by HMT. The proceeds of the issue will be used to fully redeem the preference shares held by HMT.
  • The capital restructuring is expected to improve materially the quality of RBS's capital structure by increasing RBS's pro forma Core Tier One ratio by just under 1 per cent, to between an estimated 6.9 per cent and 7.4 per cent. This will further enhance RBS's financial strength to the benefit of all customers, counterparties and investors.
  • The redemption of the preference shares held by HMT will also remove the annual cost of the preference share dividends of £0.6bn and will improve the Group's cashflow and capital generation. In recognition of this benefit and the needs of its customers in difficult times, RBS intends to increase lending across its UK businesses by £6bn and to extend the baseline lending commitments given in October 2008 in respect of mortgage and SME customers to larger UK corporates.
  • Various additional initiatives are being progressed by the Government to further stabilise the UK banking system and enhance support for the economy. These are expected to focus on asset and funding risks which are central to freeing up additional lending capacity whilst augmenting the impact of the capital measures described above.

Stephen Hester, RBS group chief executive, said: “The dislocation of credit markets and the global economic downturn continue to hit RBS hard, as with many other banks. We are making progress in recognising excess risk and dealing with it. Significant uncertainties and risks inevitably remain. In this context, the support we are receiving from government benefits all our stakeholders and enables us to provide more customer support in return. With enhanced core capital, removal of the preference share dividend and the prospect of further asset and liquidity measures, RBS is able to continue its strategic restructuring purposefully.”