The Chancellor looks set to decide the future of the taxpayer-backed lender this week following a government-commissioned review of the business.
Pressure is mounting on George Osborne (pictured) to split Royal Bank of Scotland into ‘good' and ‘bad' banks.
A decision could come on Friday when the bank publishes results for the third quarter of the year with analysts expecting profits of £440m, the Daily Mail reports.
Former Tory Chancellor Lord Lawson, a member of the Parliamentary Commission on Banking Standards, yesterday urged Osborne to break up RBS.
He said: ‘The Royal Bank of Scotland, which includes Nat West and a number of other important banks, should be split into two, all the bad loans put into a bad bank and then a good bank could be privatised quickly and can get going lending to small businesses who badly need that facility.'
But it is thought Osborne will resist calls for a split and instead order RBS to run-down about £50bn of problem loans - mostly related to commercial property and the troubled Irish business Ulster Bank.
Such a decision is likely to prove controversial though many observers in the City believe a full-blown break up would be a bad idea.
Ian Gordon, an analyst at Investec, said: ‘I don't know a single shareholder who thinks a break up is a good idea.' He also warned that RBS faces a mounting compensation bill for mis-selling insurance alongside loans to small businesses.
The bank has so far set aside just £750m for interest rate swaps, despite trawling through 9,713 cases. By contrast Barclays has put aside £1.5bn for 3,412 cases.
Sources close to RBS suggest it has sold less of the more risky swaps.
But Gordon said the numbers do not stack up: ‘RBS sticks out like a sore thumb as being materially under-provided. The simple fact is that it has made half the provision but has more than three times as many cases.'
He believes RBS will set aside £300m in the final three months of the year and £500m next year.
But he does not expect the bank to make a significant provision for the third quarter when it publishes its latest figures on Friday.
The consensus among analysts is that RBS will make a profit of £440m in the three months to the end of September, down from £548m in the second quarter and £826m in the first quarter.
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