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UPDATE 2-EXCLUSIVE-RBS to park billions in shipping loans at 'bad bank' -sources

Jonathan Saul
Friday, 15 Nov 2013 | 10:35 AM ET

-sources@

* $4-5bln of shipping loans to be placed in bad bank - sources

* Shipping forms part of CEO's strategic review

(Adds further comment, details)

LONDON, Nov 15 (Reuters) - Royal Bank of Scotland (RBS) is reviewing its shipping loan business and is expected to place billions of dollars from the portfolio in the part-nationalised group's new internal "bad bank", sources familiar with the matter said.

The industry sources said the group's shipping exposure is being examined as part of new Chief Executive Ross McEwan's strategic review, the results of which are due in February.

Shipping has weighed heavily on its financiers, with the industry facing one of its worst downturns in decades. Ship owners ordered large numbers of new vessels between 2007 and 2009, just as the global economy ran into its biggest crisis since the 1930s.

"A big chunk (of the shipping portfolio) will go into the bad bank and the intention is to sell it down as quickly as possible," one source said.

"They will definitely also exit a number of relationships, even on performing loans. It will be a much smaller exposure for a much smaller bank. This is coming from outside of the shipping business."

The sources said that an estimated $4 billion to $5 billion of shipping loans are expected to go into the bad bank, with the total shipping portfolio now standing at an estimated $16 billion.

RBS declined to comment on its shipping business on Friday.

The bank, 81 percent owned by British taxpayers, said this month that it would create an internal "bad bank" to fence off its riskiest assets, part of a series of measures designed to heal its relationship with the government and speed its eventual privatisation.

Trade sources this week said that RBS was in talks to sell a shipping loan worth close to $800 million.

Britain aims to offload its stakes in RBS and state-backed rival Lloyds Banking Group as soon as possible, having pumped in a combined 66 billion pounds ($106 billion) to keep the banks afloat during the 2008 financial crisis.

TOXIC ASSETS

Earlier this week, sources said that Lloyds had sold between $500 million and $550 million of shipping loans after divesting a separate $750 million tranche last year.

"RBS may try the Lloyds approach to selectively sell or package loans down the road - $500 million now, $500 million in six months - and get the best pricing, especially if the market keeps improving," another source said.

"Or they could select the most toxic assets in the bad bank and have a fire sale, get 20 percent on the dollar and take a huge loss on a small part of the toxic stuff. That would help their overall ratios and buy some more time. It's a huge portfolio and it would be very difficult to sell wholesale."

Several European banks including RBS and Lloyds are seeking drastic reductions to their shipping loan portfolios as they clean up their balance sheets to become less risky while regulators demand that they hold more capital.

RBS had been among the top lenders to the sector, with its shipping boss, Lambros Varnavides, one of the industry's most influential players. Varnavides helped the bank to build a particularly strong presence in the lucrative Greek market.

Several industry sources said Varnavides is expected to retire soon. RBS declined to comment.

"Lambros has been such a huge industry figure for so long. It is unclear who will be his successor or whether there will be another separate head of shipping," a separate source said. ($1 = 0.6215 British pounds)

(Additional reporting by Matt Scuffham; Editing by David Goodman)