State aid: EC approves amendments to restructuring plan of Royal Bank of Scotland
10 Apr 2014 12:47 PM
The
European Commission has concluded that proposals by UK authorities to
amend Royal Bank of Scotland's (RBS) restructuring
plan are in line with EU state aid rules. The
Commission has found that a delay of the divestment
of RBS's UK SME bank entity Rainbow will not jeopardise
the viability of the business. The Commission has also agreed to
changes of the terms of the priority dividend received by the UK. The
changes endorsed yesterday better align the incentives of RBS with those
of the UK without resulting in lower dividends as compared to what
RBS could realistically be expected to pay under the existing
terms.
Commission Vice President in charge of competition
policy Joaquín Almunia said:
"Establishing Rainbow as a standalone market player is key to increasing competition
in the UK market for banking services to
SMEs. The
Commission has agreed to extend the deadline for
divesting Rainbow because the UK authorities and
RBS haveproven their commitment to create and divest
Rainbow as a solid standalone bank."
In
2009, the Commission approved RBS's restructuring plan
(see IP/09/1915). As part of the restructuring
plan, the UK committed to divest RBS's UK SME banking operations,
Rainbow, to remedy competition concerns in the concentrated UK SME
and mid-corporate banking sector, where RBS is the leading bank.RBS tried to
divest Rainbow by proposing to transfer Rainbow's assets and
liabilities to a buyer with existing banking operations in the UK retail and
SME market. However, after three years
of unsuccessfulnegotiations with potential purchasers, RBS had to
modify its plans and instead proceed to establish Rainbow as a
standalone bank. This meant that RBS was unable to respect the
committed deadline of end December 2013 and the UK requested to postpone the
Rainbow disposal by several years. The UKauthorities have committed that
RBS would develop the Rainbow business as a fully viable bank on a
standalone basis and preserve the viability and competitiveness of the Rainbow
business until the full divestment. The Commission is satisfied that the
viability and competitiveness of Rainbow will not be endangered by the
delay.
The
2009 restructuring plan also provided that RBS should pay a priority dividend
(Dividend Access Share - DAS) to the UK state before paying any
dividends on shares. However, expectations that RBS would return to
significant profit as of 2011 have not materialised and no payments
have been made under the DAS.Looking to the
future, the previous terms of the DAS, and
RBS's lower than expected profitability, would probably
have discouraged dividend payments and encouraged capital
retention. To address this situation, under the amended terms, the DAS is
replaced by a fixed dividend amount, which RBS will pay to HM
Treasury. The Commission considers that a private investor would have accepted
such changes and that they confer no advantage to RBS. The Commission therefore
concluded that the amendments to the terms of the DAS involve no additional
state aid to RBS.
Background
RBS
is one of Europe's largest financial services groups. During the
financial crisis, in late 2008, RBS was on the verge of
collapse.
Amongst other measures of state support,
RBS received a recapitalisation of £25.5 billion from the UK State
against the issuance of B Shares. In conjunction with the issuance of B
shares, HM Treasury received the right to a single global
"dividend access share" (DAS), which is a discretionary
non-cumulative priority dividend. In practice, RBS has not paid any
dividends under the DAS. Since 1 January 2012, for any new
recapitalisation, if a bank is unable to pay the dividend on a state hybrid
instrument in cash, it has to pay it in new shares (see IP/11/1488).
The
non-confidential versions of these decisions will be made available under the
case number SA.38304 in the State Aid Register on the competition website once any confidentiality issues have been
resolved. New publications of state aid decisions on the internet and in the
Official Journal are listed in the State Aid Weekly e-News.