Future of state-backed UK lender RBS set to be cleared up
* RBS to report a decline in Q3 operating profit
* UK government to unveil findings of break-up review
* Independent review to criticise bank's SME lending record
By Matt Scuffham
LONDON, Oct 31 (Reuters) - The future of Royal Bank of Scotland should become clearer on Friday, with Britain's finance ministry expected to reveal if it wants the state-backed lender to be broken up.
Bankers and political sources say the most likely outcome is that RBS, 81 percent-owned by the government, will agree to create an internal 'bad bank' to house more of its problem loans, with the government deciding against a formal break-up.
The plan would see its existing non-core unit, home to bad loans worth 45 billion pounds ($72 billion), enlarged and revamped, with the run-down of those assets accelerated.
RBS's new Chief Executive Ross McEwan, who took up the role at the beginning of last month, will set out his vision for the bank publicly for the first time. RBS will also unveil its third-quarter results.
But a full strategic review is not expected until RBS's 2013 results in February.
McEwan is expected to consider various options aimed at refocusing the bank on domestic lending, including speeding up the planned sale of its U.S. business, Citizens, and further slimming the bank's investment activities.
Another perspective will come from former Bank of England Deputy Governor Andrew Large, who on Friday will publish the recommendations of his independent review into the bank's lending to small businesses, commissioned by RBS in July.
Large is expected to be critical of RBS's lending record since it was rescued by the government via a 45.5 billion pound bailout during the 2008 financial crisis.
The Treasury, aided by investment bank Rothschild and U.S. asset manager BlackRock, has spent four months considering whether RBS should be made to hive off its soured assets into a separate legal entity.
Advocates of a break-up, including former Bank of England Governor Mervyn King and ex-UK finance minister Nigel Lawson, say it would leave the bank better placed to lend and support the UK economy. But industry analysts argue it would be too expensive and complicated.
They say RBS has already wound down or sold off the vast majority of its bad loans and the need for approval from RBS's minority investors makes the plan unworkable.
RBS is set to report an operating profit of 800 million pounds, compared with 1.047 billion the year before, according to forecasts supplied by the bank, reflecting the slimming down of its investment activities in response to political pressure.
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