THE cost of splitting Royal Bank of Scotland into a good and bad bank is likely to outweigh the benefits and leave taxpayers worse off, according to ratings agency Fitch.

Chancellor George Osborne ordered a review of the proposal after it was recommended by the Parliamentary Commission on Banking Standards.

Investment bank Rothschild has been hired to look into what the consequences might be and is expected to report back in October.

Yesterday, Fitch said: "A bad bank split is unlikely, as we believe the costs, obstacles and uncertainties involved in transferring some assets to a state-run bad bank would exceed the benefits, in particular to the UK government as majority shareholder in the bank and potential acquirer of assets from the bank."

The option has drawn mixed reaction, with outgoing RBS chief executive Stephen Hester warning that a split would be costly and time-consuming but former Bank of England Governor Lord King supportive.

Fitch outlined that RBS's recent strong half-year results - where it posted a profit of £1.4 billion against a £1.7bn loss from the same period a year earlier - suggest the bank can continue to operate viably under its current strategy and structure.

While Fitch did not estimate how much the carve-up could cost, the agency believes shareholders other than the UK Government, which holds 81% of RBS, would want to see a "compelling valuation benefit" before supporting a split, which would also take up large amounts of management time.

Fitch said: "Uplift for shareholders could be difficult to achieve with the costs, legal complexities and valuation adjustments that accompany a good bank/bad bank scheme."

Assets under consideration for the bad bank are thought to be in Ulster Bank, UK commercial real estate and legacy loan portfolios.

Despite not giving an estimate on how much a potential carve-up could cost, it did suggest public sector debt would likely have to increase by the size of the assets.

Fitch believes the most likely course of action is for RBS to continue to deleverage further, possibly float part of its US Citizens Bank and reshape its markets business.

However, the agency said there were still uncertainties over the costs of legal actions and possible fines by regulators and added: "This risk remains unquantifiable but potentially significant and would be difficult to remove with a bad bank split."

RBS recently appointed its retail boss Ross McEwan to replace Mr Hester with the New Zealand born executive to take over in October. A Treasury spokesman said: "The Government has set out the next stage of its plan to take the banking system from rescue to recovery.

"As part of that, it set out the three objectives that underpins its approach to its stakes in RBS: maximising RBS's ability to support the economy, getting the best value for the taxpayer, and doing what we can to return RBS to the private sector.

"The review into creating a bad bank out of RBS is already under way, expert advisers have been appointed and it will conclude in the autumn."

The Treasury is reportedly considering injecting another £1.5bn into RBS if the report recommends it be carved up.

However, Mr Osborne has already pledged not to put any more taxpayer money into the bank.

As an alternative, the Treasury is thought to be mulling the recycling of funds from RBS's dividend access share, which prevents the bank paying dividends to normal shareholders.

The golden share was put in place at the time of the bank's £45bn bailout in 2008 to give the Government first access to any dividends paid by the bank.

RBS would have to compensate the Government with up to £2bn to buy out of the arrangement.

Shares in RBS ended the day 11.7p up, a rise of more than 3.5%, to 344.7p.

Separately, almost five million Lloyds customers who are being switched to TSB will get a further glimpse of their new bank this week when its website goes live.

The TSB chain is scheduled to be appearing on the high street from September 9.