Royal Bank of Scotland downgraded following 'bad bank' plans

The UK's second largest bank loses its A-rated status, reports Keely Lockhart

Royal Bank of Scotland is still the bad boy of the British banking world. On Thursday 7 November, credit ratings agency Standard & Poor's (S&P) downgraded RBS's long-term debt rating from A- to BBB+ and maintained a "negative outlook" for the bank. This means that the agency may well consider a further downgrade of the bank's creditworthiness, or its ability to meet its financial obligations. It comes after RBS announced it is to create an internal "bad bank" to deal with its toxic loans.

RBS, which is majority owned by the UK taxpayer, recently reported a loss of £634 million for the three months to September 2013. Of the UK's five biggest banks to report their third quarter earnings, RBS was the worst performer. HSBC came top with a profit increase of 10 per cent, while Standard Chartered and Barclays saw profits fall and Lloyds posted a loss of £440 million.

Toxic loans

RBS has blamed its poor performance in part on the number of toxic loans it has on its books - so-called because they're loans that RBS expects will never be paid back. The bank is now attempting to deal with these by creating an internal "bad bank" which would mean ring-fencing the £38 billion of toxic loans and other poor quality assets it holds, keeping it entirely separate to the rest of the bank.

Chancellor George Osborne seems positive about the decision to create an internal "bad bank" and RBS's new chief executive, Ross McEwan, seems happy enough to get the issue out of the way. However, not everyone is pleased with the decision.

Cosmetic exercise

According to a report by Reuters, one of RBS's biggest private investors told the news organisation that the restructuring of RBS is a "cosmetic exercise". This institution holding shares in RBS told Reuters press agency: "RBS already has an internal bad bank, so it's just a question of moving some assets into it, shuffling loans around the disclosures; nothing really changes."

The downgrade by S&P put the equivalent of a big fat red mark on the beleaguered bank, and as a result, on Friday RBS shares closed in London at 322.5p, down 7 per cent over the week. It's a long way from the 500p per share the government paid to rescue the bank in 2008, which makes the prospect of a share sale equivalent to the recent Lloyds sale highly unlikely in the near future.

To top it all off, RBS is facing a probe into its currency exchange practices. It recently suspended two traders after it emerged the bank is under investigation for possible manipulation of foreign exchange rates. It seems that no matter how hard RBS tries it won't be able to escape its bad bank image for a considerable time yet.