Church Of England Backs £1bn RBS Branches Bid

By Mark Kleinman, City Editor

The Church of England's endowment fund is backing a bid for more than 300 Royal Bank of Scotland (RBS) branches amid intense pressure on the banking industry to reorient its moral compass.

Sky News can exclusively reveal that the Church of England Commissioners, who manage £5.5bn of investments, have agreed to plough the money into a consortium being led by Lord Davies, the former trade minister.

The development comes a week after a parliamentary commission whose members included the Archbishop of Canterbury, Justin Welby, published a wide-ranging group of recommendations aimed at reforming the City's ethics and governance.

The size of the Church Commissioners' investment in the consortium attempting to buy a substantial stake in the 316 RBS branches is unclear, although it is expected to be measured in the millions of pounds.

The other members of the bidding group are Corsair Capital, a private equity firm where Lord Davies is a partner; Centerbridge, an American investment firm; RIT Capital, a vehicle headed by Lord Rothschild; and Standard Life, the insurance and pensions group.

The consortium wants to buy a major stake in the network ahead of an initial public offering on the stock market.

Insiders believe the Church Commissioners' involvement will enhance the consortium's appeal to the board of RBS and the Treasury, which is likely to play an important role in deciding the outcome of the £1bn auction.

The Corsair bid is vying with another offer comprising around two dozen big City institutions such as Foreign & Colonial, Schroders and Threadneedle Investments. A third bid involving Blackstone and AnaCap, two private equity firms, is still in the frame but is thought to have only an outside chance of buying the branches.

All of the bidders are now conducting due diligence on the branch network, with a decision expected in the coming weeks about a preferred buyer. RBS may decide to float the business on the stock market in the conventional way, or it could do so in conjunction with the sale of a minority stake.

The branches auction was triggered by Santander UK's withdrawal from a deal last year to buy the network, citing IT challenges.

RBS was ordered to offload the network, which has a roughly 5% share of the UK business banking market, by the European Commission in 2009 in return for the £45.5bn of state aid required to rescue the bank.

It is not unprecedented for the Church Commissioners to invest in a corporate bid of this kind, although it is thought to be the first time that they have sanctioned participation in a consortium bid for British banking assets.

The church fund holds a wide range of equities, property and other assets, but does not invest in industries such as tobacco or payday lending.

The Commissioners' fund aims to generate an annual return of RPI plus 5%. According to its annual report the private equity part of its portfolio, which invests in unlisted companies, achieved a return of 2.9%, while it made new private equity commitments during the year of almost £25m.

The Church Commissioners also hold shares in Barclays, and said in the recent annual report of their Ethical Investment Advisory Group that the bank's involvement in the industry-wide Libor-rigging scandal demonstrated that it had "lost sight of its fundamental role in society and its wider obligations".

"We have engaged intensively with Barclays since last June, including at Board level. We have been encouraged by the determination of the bank's new leadership to turn a corner and to foster a more ethical culture," it said.

"However, ethical conduct cannot simply be enforced. We will know that Barclays has truly transformed when it inspires its staff to make sustainable profits through serving its customers and fulfilling its fundamental role in society."

Last week, Antony Jenkins, the chief executive who replaced Bob Diamond in the wake of the Libor debacle, joined the Archbishop of Canterbury at a City debate about banking ethics.

"In the last 10 years, banks adopted remuneration policies that meant that a relatively small number of employees took such a large part of the overall revenues as to make it impossible for the widest number to benefit – or for there to be adequate capital, in some cases, for the enterprise to remain self-sustaining," said Dr Welby.

Many of the recommendations of the Parliamentary Commission on Banking Standards, including deferring bankers' pay for 10 years and cancelling their pensions in the event that their institution requires taxpayer support, are designed to restore public trust in the industry.

The Treasury will issue its detailed response to the report next month.

In a speech at Mansion House last week, George Osborne, the Chancellor, said there was a case for examining whether the sale of the RBS branch network, which has the code-name Project Rainbow, and a larger set of assets by Lloyds Banking Group would go far enough to enhancing competition in British banking.

A spokesman for the Church Commissioners declined to comment on the fund's involvement in the RBS bid.

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