November 30, 2012 6:28 pm

RBS calls off sale of Indian operations

Royal Bank of Scotland on Friday suffered another setback in efforts to strengthen its balance sheet, a day after analysts warned it was the most exposed of the UK lenders to the tough new capital regime ushered in on Thursday by the Bank of England’s Financial Policy Committee.

RBS announced the cancellation of a deal to sell its retail and commercial operations in India to HSBC, in an echo of the collapse in October of a sale of more than 300 UK branches to Santander.

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The setback was more symbolic than material, however, analysts said. The business has been shrunk gradually since the original deal with HSBC was struck in the summer of 2010, and now comprises just £190m of assets. The sale is understood to have run into regulatory difficulties. RBS said it would now close the business down instead.

“It is easy to suggest that another failed disposal represents a pattern of careless behaviour, but such a conclusion would be harsh,” Ian Gordon, banks analyst at Investec, wrote in a note to clients. “RBS agreed to sell its Indian R&C business to HSBC in July 2010, and had expected to crystallise a small premium to book value of circa £60m. The deal has collapsed but, to put this into perspective, it is not another Santander, and incremental wind-down costs should be modest.”

Nonetheless, the failed transaction highlights the central role that balance sheet shrinkage will have on RBS’s ability to meet any tougher capital requirements.

The FPC has asked the Financial Services Authority to conduct a detailed review of the reliability of banks’ reported capital ratios by the time of the committee’s next meeting in March.

The committee said the FSA should look at three areas of potential capital weakness: inconsistent and in some cases flattering calculations of risk-weighted asset numbers; the ongoing hit to capital from spiralling legal and consumer compensation payouts; and underestimates of future credit losses.

It is unclear exactly how each bank will be affected by the FSA’s assessment, but RBS looks the worst placed. In addition to having the lowest reported core tier one capital ratio – 11.1 per cent as at the end of September – it is also facing a payout of an expected £300m-plus to settle its involvement in the Libor rate manipulation scandal.

Investec estimated the bank’s relaunched attempt to sell the UK branch portfolio, compulsory under an EU state aid ruling, would crystallise a £500m loss.

The bank is also the largest UK holder of commercial mortgages, a key concern for the FPC, which believes banks are being too optimistic in their valuation of those loans.

Its options for raising capital are restricted. The government, which owns 82 per cent of the bank, has made clear it will not inject fresh equity, and there are technical obstacles to issuing contingent convertible debt (cocos) as Barclays recently did. The FPC’s conclusions are likely to intensify pressure on the bank to sell its US franchise, Citizens, reckoned to be worth £10bn.

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