Check out these impairments, from RBS’s just-released interim results:
Impairments, however, rose sharply to £7,521 million, compared with £1,479 million in the first half of 2008. Over 70% of the impairment costs arose in the Non-Core division, but the Group also experienced a significant rise in credit costs in all core divisions, reflecting the continuing deterioration in economic conditions. Approximately 70% of the impairments and write-downs incurred in the first half are attributable to assets covered by the Asset Protection Scheme, subject to any changes to the Scheme, where some important issues remain open.
You can see that, like Lloyds, the bank is also attempting to reassure investors that these will be covered by the UK government’s Asset Protection Scheme.
Now the initial terms of RBS’s participation in the APS were agreed in February but have yet to be finalised. APS is pretty essential for the bank, since without it, it won’t be able to pass the FSA’s mandated stress tests and would, in its own words, be vulnerable to ratings downgrades and funding difficulties.
In RBS’s case the APS involves protection for £316bn in assets, with the bank taking the first £19.5bn of losses, and thereafter 10 per cent, with taxpayers on the hook for the remaining 90 per cent. The trade-off is that the bank has to pay a participation fee, and make additional lending commitments and other comprises, in exchange for the boost to its capital. In short, participation in the scheme could be quite painful for the bank.
Here’s RBS’s comment, from today’s statement:
Notwithstanding APS’s importance, it is by no means “free”. Our central case estimates suggest that the cost to HMG of APS will be broadly recouped through the substantial fees and tax give-ups to be paid by RBS, although other more positive and negative outcomes remain very real. Additionally, EU approval for the “state aid” given to RBS is uncertain as to both timing and outcome. RBS’s massive restructuring programme provides a comprehensive and rigorous path back to standalone viability which the EU needs to review. Additionally it seems likely to require weakening of our core UK banking franchise, especially for business customers. Negotiations are ongoing here and we are very cognisant of the business disruption risks to customers and our ability to serve them, as well as to our own prospects of successful recovery.
However we are still waiting for the finalised terms as well as that EU approval. What’s holding the process up?
According to RBS one issue appears to be the final sign-off of the actual assets to be covered by the scheme, as well as the price of the coverage. It appears, in fact, that RBS is having a rather hard time satisfying Her Majesty’s request for information on the assets to be covered. From the statement:
The APS itself, while conceptually straightforward, has enormous operational complexity which is taking time to resolve. For example, HMG has requested regular reporting on up to one billion lines of data covering assets in the scheme and our own systems and data quality are not well designed for the APS purpose.
What, the purpose of actually evaluating and pricing assets?
Shocking.
Related links:
Lloyds out of the frying pan and out of the APS? – FT Alphaville
Laughing Lloyds – FT Alphaville