Banks facing long road back to recovery

The results from part-nationalised Royal Bank of Scotland and Lloyds Banking Group this week will highlight the long haul to recovery ahead for both banks after huge taxpayer bailouts.

The painful rebuilding work has begun with the worst of the financial crisis over - involving thousands of job cuts and raising tens of billions in extra capital.

But the estimated £10 billion losses racked up between them for 2009 bears witness to the deepest recession in 30 years as loans to businesses and homeowners turn sour.

Meanwhile, a break-up of both banks looms to soothe European competition concerns following the public support needed to weather the storm.

RBS reported a record £24.1 billion loss for 2008 and today's figures reveal a further slide into the red amid bad debts and write-offs.

The investment banking arm - set to generate controversial bonus payouts for its staff - has been one of the few highlights of the group's performance as the economic turmoil sends shockwaves through other parts of the bank.

And although chief executive Stephen Hester still hopes to return the overall bank to profit in 2011, he has warned of a long and difficult recovery - saying that the economic fall-out from the recession "will take years to subside".

The taxpayer's economic stake now stands at 84% after RBS agreed terms with the Government over an insurance scheme for its toxic debts in November - which involved a further £25.5 billion being pumped into the bank.

The revised terms of the Asset Protection Scheme (APS) heap far more of the first loss - like an insurance excess - on RBS to reflect gradually improving economic conditions, but the taxpayer has taken a big hit so far.

Based on current share prices, the public sector is around 30% - or £13 billion - down on the £45.5 billion it has pumped into the bank, with RBS shares trading at 35p compared with the average 50p paid.

Lloyds saved HBOS from nationalisation in October 2008 but the extent of the reckless lending brought in with the acquisition has left the deal looking like an albatross around the once-conservative bank's neck, although management still defend the acquisition.

The bank expects a stronger trading performance this year and in 2011, but retail bad debts reached £3.3 billion for the first nine months of 2009.

Its wholesale banking arm reported a vast £12.9 billion in loan losses, largely thanks to HBOS.

Lloyds - set to post losses of around £3.8 billion this week - avoided the APS through a £20 billion rights issue and fundraising with bondholders carried out late last year.

The public stake has edged down from 43% to around 41% after the bank issued new shares in exchange for bonds earlier this month - but again the taxpayer is nursing another hefty loss so far.

The Government paid out £5.7 billion to support Lloyds' £13.5 billion record rights issue last year, adding to the £14.5 billion of public cash already in the bank.

According to the National Audit Office, the public sector paid an average 74p for the 27 million shares it holds in Lloyds, leaving the public purse with a current paper loss of £6 billion with shares around 51p.

There has been some clawback for the taxpayer, however, as Lloyds paid a £2.5 billion fee to the Government for benefiting from the implicit guarantee of the APS scheme even though it eventually managed to avoid its clutches.

Both banks will look far different in the future following the conditions imposed by the European Commission in return for the public support given to the pair.

Lloyds has made five disposals of non-core businesses such as online insurer esure since last summer, but the Commission has ordered it to sell 600 branches - including the TSB brand, Cheltenham & Gloucester, Lloyds TSB's branches in Scotland and some in England and Wales. This represents around a fifth of its UK network.

RBS meanwhile will have to sell 318 branches of the former Williams & Glyn's outlets in England and Wales and its NatWest branches in Scotland.

Its insurance business - home to brands such as Churchill, Direct Line and Privilege, as well as Green Flag motor insurance - is also on the block, as well as its global merchant services business and the majority stake in the Sempra commodity trading arm.

The Government hopes such asset sales - as well as the return of Northern Rock to the private sector - will eventually trigger more competition in banking following the succession of bail-outs and consolidation seen in the sector to weather the financial storm.

Under the bail-out terms, RBS and Lloyds agreed to lend an additional £39 billion to homeowners and firms in the year to February 2010 to help a credit-starved UK through the recession.

The pair will achieve mortgage lending targets but business lending pledges will not be met and MPs have called on the Treasury to beef up its powers to enforce them.

But after a year in which the banking industry's reputation has sunk to rock bottom - and news of a likely £1.6 billion bonus pot for RBS's investment bankers - the UK public will demand that both companies step up to the plate to help a beleaguered economy out of recession.