RBS Eyes Dividend As It Seeks New Cost Cuts

Royal Bank of Scotland (LSE: RBS.L - news) (RBS) is to begin talks with ministers about moves to reinstate dividend payments as it prepares to embark on a "substantial" new round of cost-cutting that could lead to thousands more jobs being shed at the state-backed lender.

Sky News can reveal that the bank's new chief executive, Ross McEwan, will signal on Friday that he wants to return RBS to the dividend list as quickly as possible as part of a wide-ranging clean-up operation that will be endorsed by George Osborne, the Chancellor.

Insiders say that RBS is likely to disclose alongside its third-quarter results that it is commencing negotiations with the Treasury about buying out an instrument called the Dividend Access Share (DAS (Shenzhen: 002421.SZ - news) ), which has the bank paying dividends to ordinary shareholders for the last five years.

Created as part of RBS's £45.5bn bail-out in 2008, the DAS is widely viewed as a crucial roadblock obstructing the bank's return to normality, although agreeing its dissolution will not be straightforward.

Mr McEwan will have to agree a fair market price to buy out the instrument - which is likely to cost well over £1bn - while any deal would also have to be agreed by Brussels, which supervises state aid agreements involving European Union members.

Sources cautioned that while the announcement would be "a positive step", the painstaking nature of RBS's overhaul meant that it could still be several years before it was able to gain regulatory approval to reinstate dividend payments.

"Once the decision is taken, and we’re confident that RBS is focused on being that UK corporate and retail bank it needs to be, then the Government is ready to discuss how, for a fair price, we get rid of the Dividend Access Share," Mr Osborne said in June.

"That would be a milestone on the road back to full private ownership for RBS, a destination we all want to reach."

Mr McEwan is expected to say on Friday that he is undertaking a wide-ranging review of RBS's entire network of operations, assisted by the management consultancy Bain & Co, which includes an examination of the future of Ulster Bank, its troubled Irish subsidiary.

Substantial cost reductions, including job cuts, are inevitable, insiders say, although details may not emerge for several more months. A source said there was no standalone review of Ulster Bank taking place but conceded that it was part of the wider examination of RBS's business.

The previously undisclosed measures will form part of a package presented by Mr McEwan and Mr Osborne as a relaunch of RBS, which remains 81%-owned by the taxpayer and with no immediate prospect of a reduction in that shareholding.

The principal elements - revealed by Sky News last weekend - include the placing of approximately between £35bn and £40bn of toxic loans into a newly-rebranded non-core division known as an "internal bad bank".

RBS will accelerate the run-off of these impaired assets, which largely consist of soured Ulster Bank and UK commercial property loans, and the disposal of its US retail bank, Citizens (NYSE: CIA - news) , through either a stock market listing or a sale to another banking group.

It will also announce the further shrinkage of its investment banking arm, which has been frequently criticised by Mr Osborne since the 2010 general election, with a refocusing of the remaining operation on serving UK-based corporate customers.

Taken together, the measures will amount to a reshaping of RBS although they will fall well short of the radical break-up advocated by some members of the Parliamentary Commission on Banking Standards, which criticised the political inaction over RBS’s future in a report during the summer.

The decision to leave the toxic loans on RBS's balance sheet will avoid the prospect of a shareholder vote that could have embarrassed the Chancellor, although Sky News understands that the new "bad bank" division will have what one source called "appropriate governance arrangements", meaning that it may operate at arm’s length from the rest of the group.

RBS has axed tens of thousands jobs since its bailout by taxpayers and Mr McEwan is expected to spell out plans for further redundancies at its full-year results next February.

It is understood that Coutts, RBS's wealth management arm, will escape any substantive action from the structural review despite speculation that its international arm was a candidate to be offloaded.

Friday's quarterly results are themselves expected to indicate further progress in the bank's restructuring, including a return to the black during the three months to September 30.

Announcing the review of RBS, which has been conducted with the assistance of BlackRock (NYSE: BLK - news) , the asset manager, and Rothschild, the investment bank, Mr Osborne said in June that he wanted to see "whether it's right for Britain to, in effect, see RBS broken up".

"We'll look at a broad range of RBS’s assets, but particularly assets in Ulster Bank and UK commercial real estate. We're not prepared to put more taxpayer capital into RBS as part of this process," he said.

"We will establish a Bad Bank if it meets our three objectives: if it supports the British economy; if it's in the interests of taxpayers - and if it accelerates the return to private ownership. But if the review reveals that it would not achieve these things, then we won't do it.

One challenge facing Mr Osborne will be the scrutiny of Andrew Tyrie, the MP who chaired the Parliamentary Commission. In its final report, it called for radical action to transform RBS into a bank that could support the UK economy.

The resolution of the conflict over the future of RBS, whose shares languish well below the level at which taxpayers rescued it, will bring relief to RBS managers tired of repeated disputes between the Chancellor and Stephen Hester, who stepped down as RBS chief executive last month.

"It's important not to underestimate the extent to which the Chancellor and RBS will be singing from the same hymn-sheet," said a Treasury official.

Mr Osborne said in June that he would only proceed with a major shake-up at RBS if it delivered clear benefits to taxpayers and the UK economy through increased lending capacity and an improvement in RBS's value.

The structural review will be linked to a separate piece of work led by Sir Andrew Large, former deputy governor of the Bank of England, which has been examining the flow of credit from RBS to small and medium-sized businesses (SMEs).

Sky News revealed this week that Sir Andrew's report would contain damning criticisms of RBS's treatment of struggling SMEs.

In a memo to staff earlier this month, Mr McEwan said that the location of RBS’s bad assets was less important than the bank's need to focus on improving service to customers.

"The future of this company will not be about whether we operate in particular areas or where our problem assets sit," he wrote.

"The future of this company is about how good a job we do for our customers, including those who are having difficulty repaying their loans. And it will be about how well we live up to all our responsibilities, particularly those we have to the UK."

Shares in RBS, which declined to comment, closed on Thursday up 0.3% at 367.6p.