By Steve Slater and Matt Scuffham
LONDON (Reuters) - Royal Bank of Scotland (L:RBS) is likely to write down the value of its U.S. bank Citizens by about 4 billion pounds ($6.2 billion) next week, industry sources said, potentially wiping out much of the state-backed bank's annual profit.
The writedown of goodwill would be because the U.S. bank is not worth as much as RBS paid for it, and serves as another reminder of the hefty price paid for past acquisitions by former chief executive Fred Goodwin.
RBS, 80 percent owned by the UK government after being rescued in 2008, sold 29 percent of Citizens Financial Group (N:CFG) in September and is expected to reduce its stake to about a third this year, which would mean Citizens being deconsolidated from RBS Group.
The goodwill writedown is an accounting issue and will not impact RBS's capital position. Indeed, the deconsolidation would boost RBS's capital strength when it takes place.
RBS is expected to report a pre-tax profit of about 4.1 billion pounds in 2014, according to the average forecast from a poll of six analysts by Reuters. The bank estimated the goodwill it was carrying for Citizens was 4.3 billion pounds at the end of 2013, its last published estimate.
Citizens, headquartered in Providence, Rhode Island, was bought by RBS in 1988 and expanded with 25 acquisitions, including the $10.5 billion purchase of Charter One in 2004, for which Goodwin was criticised at the time for overpaying.
RBS is selling Citizens as part of a retreat to its core UK retail and commercial banking business, a process which has involved it slashing its balance sheet and quitting dozens of countries. It expects to complete the Citizens sale by the end of 2016.
UK regulators have urged RBS to speed up the sale to improve its capital strength.
RBS's core capital position should be boosted by about 200 basis points when Citizens is deconsolidated, industry sources have said.
The 186-year-old Citizens provides retail and commercial banking services to about 5 million customers in the United States and ranks as the country's 13th biggest retail bank holding, with about $130 billion in assets.