The Royal Bank of Scotland Group plc RBS plans to wind down its global shipping finance business. The company had been trying to sell the operation for past one year as the freight industry is undergoing the worst downturn.
Why Closing Shipping Finance Business?
Since Royal Bank of Scotland failed to receive a proper value for its Greek shipping operations, valued at around $3 billion (£2.31 billion), the most prominent part of its shipping assets, it opted for an overall closure of the same. Notably, the bank’s shipping portfolio incurred a £264 million impairment charge during the second quarter of 2016. Hence, not going down a sales path could mean the bank will not face any possible write-down on the value of the shipping loans on its books.
Earlier In Jul 2016, Credit Suisse Group AG CS and China Merchants Port Holdings Company Limited backed off from their respective talks on a potential purchase of the Greek business due to concerns over Brexit and a lack of interest in the operation. In addition, per the shipping sources, in the recent weeks, Japanese financial services firm, ORIX Corporation IX along with the Japan’s Southern Missouri Bancorp, Inc. SMBC entered into talks with the Royal Bank of Scotland over the purchase of the Greek unit.
The company believes that an orderly wind-down of the operation will take a few years, till the loans reach their maturity. The company believes this to be a better option for the shareholders, rather than selling assets at distressed prices.
Rationale Behind the Restructuring Initiative
Over the past year, the shares of the Royal Bank of Scotland have tanked 32.9%.
Amid a low interest rate environment, Royal Bank of Scotland’s Chief Executive, Ross McEwan, has been struggling to carry out a proper restructuring of the bank, including the sale of the bank’s assets and thousands of job cuts. The current plan to close down shipping finance business will be in line with the bank’s strategy to create a simpler, stronger, and more sustainable bank, better aligned to the needs of the customers in the U.K. and Western Europe.
In addition, Royal Bank of Scotland has not been able to earn profits since 2007 and was bailed out by the British taxpayers in 2008. Also, in order to improve its financial position, the bank sold billions of pounds worth of assets. However, many of them were sold at a loss as the bank tried to come out from its pre-crisis era of acquisitions done at hefty prices.
The closure of the shipping business is expected to lead to around 20–25 job cuts at The Royal Bank of Scotland, while around 10 people are expected to stay to assist in winding down the business. Further, the company spokesperson said, "We understand how difficult this will be for our staff and we will be offering support to those affected, including redeploying people in to other positions where we can."
Currently, Royal Bank of Scotland carries a Zacks Rank #3 (Hold). If you wish to see some of our better-ranked stocks, you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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