Dow Jones: RBS To Split In Two As Northern Rock Boosts Lending

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2-23-09 8:17 AM EST

LONDON (Dow Jones) -- Royal Bank of Scotland Group plans to split in two, slash costs by more than 1 billion pounds ($1.46 billion) and potentially cut up to 20,000 jobs, as nationalized U.K. lender Northern Rock prepares to reverse course and revive its mortgage lending.

RBS (RBS) will announce some of its plans on Thursday as it unveils details of its 2008 loss, which the bank has previously said could be as much as 28 billion pounds -- the biggest in U.K. corporate history.

CEO Stephen Hester will try and ring-fence about 300 billion pounds of unwanted and risky assets -- around a fifth of the balance sheet -- in a new subsidiary, according to a person familiar with the situation.

The division would act as a type of "bad bank" that would allow investors to more easily assign a value to the core operations. The segregated assets could then be either sold off or run down by RBS over the next three to five years.

Among the businesses that could be wound down are the bank's Australian units and its aircraft-leasing business, the person familiar with the situation said.

The bank may exit from as many as half of the 60 countries in which it currently operates, Dow Jones Newswires reported. Cash could also be raised from the sale of some Asian operations acquired in the takeover of ABN Amro.

Former chairman Tom McKillop told a U.K. parliamentary committee earlier this month that the acquisition of ABN Amro had been "a bad mistake" and that the bulk of what it had paid for the business will be written off as goodwill.

The Financial Times reported over the weekend that the restructuring plans could result in job losses for up to 20,000. The person familiar with the matter said the bank, which employs nearly 180,000 people worldwide, is unlikely to reveal an exact number of job cuts on Thursday.

Taken together, the measures should reduce costs by more than 1 billion pounds, which will contribute to the bank's plans to repay about 20 billion pounds of capital injections from the U.K. government, which now owns close to 70% of RBS.

Newly appointed as CEO, Hester is expected to emphasize a renewed focus on the NatWest U.K. retail unit, its insurance business, and some businesses within its U.S. Citizens Bank unit.

Macquarie Research analyst Robert Sage said that, provided the plans can be achieved without a full government takeover, "it seems increasingly plausible that the RBS investment case may at last fine some more robust underpinning."

Trading in RBS showed investors in a buying mood, bidding the shares about 14% in early London action. The wider European banking sector also climbed to start the week amid reports that the U.S. government is in talks over expanding its equity stake in Citigroup Inc. (C).

Northern Rock u-turn

Also in focus Monday were plans by the U.K. government to revive mortgage lending at nationalized bank Northern Rock.

The U.K. had previously been gradually running down Northern Rock's operations, but now officials want the mortgage bank to make as much as 14 billion pounds in additional loans over the next two years, in a bid to help plug a hole in the U.K. lending market.

Chancellor of the Exchequer Alistair Darling told BBC Radio earlier Monday that the plan for Northern Rock is one of a series of measures the government will introduce to help reinvigorate lending.

Another eagerly awaited part of the plan is an insurance program for risky assets.

RBS reportedly wants to put at least 200 billion pounds of assets into the government plan, which would effectively limit banks' losses beyond a pre-agreed level in exchange for an annual percentage payment.

However, the value of the scheme to shareholders will depend on the detail, including how much of any further losses the bank would have to shoulder.

  (END) Dow Jones Newswires
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