London Briefing: Reshuffle expected at banking dunce RBS

Five years on from the financial crisis and some weeks we still can't get away from banks. With the UK's five largest banks all reporting quarterly figures and a focus on taxpayer exits at Lloyds Banking Group and Royal Bank of Scotland (RBS), this is one of those weeks.

Yesterday, Lloyds made yet another provision against payment protection insurance (PPI) mis-selling claims, setting aside a further £750 million (€875 million). But assuming a majority of skeletons have now been pulled out of that closet, the bank’s underlying message was strong.

Stripping out PPI, profits were up by 83 per cent to £1.5 billion, leaving chief executive Antonio Horta-Osorio confidently predicting a return to the glory days in which Lloyds was a “high-dividend” payer.

Lloyds is the British government’s poster child for banking sector re-privatisation. A government sale of 6 per cent of the bank in September allowed taxpayers a clean exit and another large tranche of the state’s remaining 33 per cent will be sold next year.

RBS, in which the government still owns 88 per cent, is the dunce of the banking class. Former chief executive Stephen Hester was sent home early from school in the summer and the government has been persistently critical of its biggest bank.

RBS's new chief executive, Ross McEwan, is expected to say on Friday that the bank has finally turned a profit. More importantly, between now and then the chancellor of the exchequer, George Osborne, is expected to announce the results of a strategic review into whether RBS should be split into a "good bank" and a "bad bank".

Pretty much everyone agrees that a split in 2008 would have significantly boosted bank lending, but the question of whether to do it belatedly is much more vexed.

In the Yes camp sit former Bank of England governor Mervyn King and UKFI chief James Leigh-Pemberton. In the No camp sit RBS's biggest private investors, including Standard Life, as well as Northern Irish pundits who rightly fear Ulster Bank would be permanently marooned in RBS's "bad bank".

Mr Osborne has hired Rothschild to advise him on strategy but it is hard to believe a decision will be anything other than political. While he would dearly love a tidier RBS to lend more, his priority is surely to be able to begin, or at least announce, a break-even sell-off of the bank before a general election in 2015.

It is impossible to see how the chancellor could do this without either spending government money to recapitalise the bad bank or critically damaging the good bank.

Having committed to a high-profile review, expect Osborne to unveil – using as many words as possible – an internal reshuffle of RBS that does as little as possible.

Emerging-market cash
Last week China, this week the Islamic world – it's full steam ahead for the British government's mission to bring emerging-market cash into the City.

British prime minister David Cameron yesterday told the World Islamic Economic Forum in London that he wants the City to be a global centre for Islamic investment. Ambitious words from a prime minister whose chancellor of the exchequer promised a Chinese audience just last week that it is his "personal mission" to make London a global hub for renminbi trading.

The UK’s appeal to Islamic investors combines a new London Stock Exchange Islamic Market Index with the first issue of an Islamic bond by a non-Muslim country.

The index will identify and monitor Islamic-compliant business activities which the LSE believes will help attract new issuers, giving the UK a slice of the $1.3 trillion a year Sharia market. And Cameron is putting taxpayers' money where his mouth is with an eye-catching £200 million sukuk or Islamic treasury bond secured on government property in central London.

Islam prohibits the charging of interest, knocking out a huge swathe of possible investments for Muslims; UK property and infrastructure projects provide excellent alternative revenues that are attractively safe and Sharia-complaint.

The government's own Debt Management Office (DMO) has poured cold water on sukuk bonds in the past, arguing that additional structuring costs make Islamic finance an expensive way for taxpayers to borrow money. In the context of an emerging-markets charm offensive, however, the DMO seems to have been persuaded to let this little one go.