Royal Bank of Scotland poised for biggest loss in UK banking history

Britain’s second largest bank expected to reveal it has lost £1 billion in first half

THE Royal Bank of Scotland is poised to unveil the biggest loss in UK banking history after taking a hit of almost £6 billion from the credit crisis.

Britain’s second-largest bank is this week expected to reveal a pre-tax loss of at least £1 billion for the first six months of the year, with analysts warning it could slide to as much as £1.7 billion in the red.

The loss would be roughly five times higher than the deficit racked up by Barclays in 1992 at the height of the last recession.

RBS chairman Sir Tom McKillop is already under pressure from investors after the bank’s recent £12 billion rights issue. His chief executive, Sir Fred Goodwin, who marks 10 years at the bank this weekend, also faces shareholder scrutiny.

The bank is scouring the world to find three new non-executive directors to shore up its board in response to shareholder concerns.

The RBS figures will cap another terrible week for Britain’s biggest banks as the credit crisis continues to take its toll.

HSBC is expected to write off almost $7 billion (£3.5 billion) in bad debts at its struggling American business from the first six months of the year. The charge will drag its profits roughly 30% lower to about $10 billion.

Barclays is forecast to reveal a 35% drop in profits to £2.6 billion as bad debts around the world, particularly in South Africa, combine with further losses from its exposure to the credit markets.

Some analysts believe Barclays could chalk up another £3 billion of writedowns, in addition to the £1.7 billion it recorded in the first quarter.

The only bright spot will be results from Standard Chartered, which makes its money in emerging markets, particularly in Asia. The bank is expected to announce a 21% jump in profits to $2.4 billion.

Across the banking sector, analysts and investors are fretting about rising bad debts. Figures from HBOS and Lloyds TSB last week revealed that the credit crisis has now worked its way into the real economy, with individuals and companies struggling in almost equal measure.

Both banks announced that bad debts had jumped more than 30%. Alliance & Leicester, which is poised to be sold to Spain’s Santander, revealed that its profits had been wiped out by problems caused by the credit crunch.

All Britain’s big banks are considering selling parts of their businesses. HBOS confirmed last week that it was reviewing a number of potential asset disposals, and admitted it had begun to wind down its off-balance-sheet funding vehicle, Grampian.

Expectations are mounting that the bank’s Australian business could be put up for sale.

RBS is in advanced talks with Allstate, the American insurance group, about a sale of its insurance operations, which include Direct Line and Churchill. Allstate is said to be willing to pay substantially less than the £7 billion asking price attached to the business when RBS put it up for auction in April.

However, RBS holds the business on its balance sheet at a carrying value of only £3 billion. Even a sale priced at £5 billion may prove tempting to Goodwin, who has promised investors that he will generate £4 billion of capital from disposals before the end of the year.

The £3.6 billion sale of Angel Trains, coupled with the £1 billion sale of Tesco Personal Finance and a handful of smaller deals, are thought to have generated about a quarter of the total target.

RBS is also thought to be close to selling an Australian corporate-finance business, acquired when it took over ABN Amro, to Commonwealth Bank of Australia. A sale of Saudi Hollandi Bank could also be on the cards.

Iain Dey
August 3, 2008

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