Lossmaking Royal Bank of Scotland is diverting more than £70bn a year from its NatWest high-street business to support its riskier financial activities, including its troubled investment bank, according to RBS filings reviewed by the Financial Times.
The annual loans from NatWest to the struggling parts of the government-owned bank will be disallowed once new regulations come into effect in 2019 that ringfence retail depositors from the rest of the bank’s operations, raising questions on financing the group in the future.
The government had once hoped to sell its controlling stake in RBS by 2020, a schedule that has already suffered a setback because of June’s UK referendum to leave the EU, which has knocked almost 20 per cent off the bank’s share price.
Ringfencing will be particularly challenging for RBS, which has posted more than £50bn of losses since the financial crisis and is on track to report its ninth successive net annual loss in 2016. Without the fillip from NatWest, the rest of RBS may struggle to fund itself on such sustainable terms.
“We are now several years on from when RBS was apparently on the brink of returning to market ownership,” said Tim Bush, head of governance and financial analysis at advisory group Pirc. “It’s difficult to see how that ever could have been the case given that things are not clear even now.”
According to reports and accounts, NatWest, which is the main subsidiary of RBS, lent £72bn to the rest of the banking group last year and £77bn in 2014. Ringfencing, which comes into force in 2019, requires the UK’s largest banks with at least £25bn of deposits to house them in a separate entity from the “non-ringfenced” part.
But the new rules, adopted in the wake of the 2008 financial crisis, raise doubts over whether RBS and other banks will be able to sustain these “non-ringfenced” entities, which will be mostly made up of cyclical investment banking activities and more reliant on costlier wholesale funding.
The bank said: “We do not recognise this report. RBS is very well funded with a strong liquidity portfolio of over £150bn and a large deposit surplus. The majority of the NatWest legal entity surplus is held on deposit with the Bank of England.”
Cora Stone, a managing director at Accenture, said, “How do you go to market and get funding for a poorly rated non-ringfenced bank? It will be expensive … Does it mean the end of non-ringfenced divisions across all banks?”
Barclays faces similar concerns about whether its corporate and investment banking arm will be able to fund itself on economic terms once it is carved out from the bank’s main UK retail operations.
Barclays says its investment bank does not rely on customer deposit funding from other parts of the group. But last year it clashed with the Bank of England after floating the idea of making the investment bank a subsidiary of the retail bank — rather than a separate entity — to help it raise cheaper finance.
HSBC is less exposed to such worries because it has a vast Asian retail and corporate banking operation with an excess of deposit funding, which will remain outside the UK ringfence.
RBS lending figures reveal the complex relationship between NatWest and the rest of the group, and the scale of potential disruption from separating retail deposits from other banking activities.
RBS has radically shrunk its investment bank since the financial crisis, and it will only amount to 15 per cent of assets weighted by risk.
It is aiming to place the bulk of its business within the ringfenced bank, which would allow NatWest to still lend to a number of internal businesses. However, it would not be able to fund the investment bank and other riskier activities.
Credit rating agency S&P Global said it expects only a one-notch differential for the non-ringfenced bank.
The level of lending from NatWest to the rest of the group shot up under former chief executive Stephen Hester, reaching more than £100bn in 2011.
A banker familiar with the process said the internal loans increased after NatWest shed a large share of its non-performing loans in the wake of the financial crisis and saw an increase in deposits from its retail and corporate customers.
The bank manages this decrease in bad loans and increase in deposits by holding cash at group level. The bulk of the internal loans from NatWest were on deposit at the Bank of England at the end of June.
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