The Royal Bank of Scotland has agreed to increase lending by £6bn after the Government said it would swap £5bn of preference shares for ordinary shares yesterday, lifting its stake in the beleaguered bank to 70 per cent.
The move came as RBS tried to purge the sins of the past yesterday as it forecast losses of up to £28bn for the year, and the market bet that the once-mighty lender was heading for full nationalisation.
RBS predicted it would lose about £15bn from the credit markets and bad debts, and up to £20bn in goodwill writedowns on the value of past acquisitions, including the disastrous takeover of ABN Amro. The bank has written off £1bn on a single loan by the Dutch bank to the chemicals group LyondellBasell, owned by the Russian oligarch Leonid Blavatnik, and could lose another £400m on the deals ABN had with Bernard Madoff.
The losses are an indictment of the bank's strategy under its former chief executive, Sir Fred Goodwin, who relied on deals and a racy balance sheet to turn RBS into one of the world's top 10 banks.
Stephen Hester, who took over from Sir Fred in late November, said RBS epitomised the mistakes made during the long credit boom. "Many people around the world became over optimistic and borrowed too much money," Mr Hester said. "RBS did leverage itself up. ABN Amro was an important element of that, though not the only element. Certainly, RBS was over-leveraged at the wrong time."
He refused to directly criticise Sir Fred but said: "Clearly, people started making judgements based on a view of the world to be more positive than turned out to be the case. Let none of us cast these stones too readily because there are lots of people in lots of walks of life ... who are guilty of mistakes." Sir Fred pursued the £10bn ABN deal after the credit crunch started, defeating Barclays but sealing his own fate in October when RBS was forced to sell 58 per cent of its shares to the Government to ward off collapse.
RBS's shares lost two-thirds of their value yesterday as investors digested the scale of the losses and bet that the Government would take full control of the lender. Existing shareholders will be offered first refusal on the £5bn of new shares at 31.75p a share – 8.5 per cent below Friday's closing price – but the chance of take-up looked remote as the shares ended the day at 11.6p.
"Nationalisation at zero value is implicit in the price," said Derek Chambers, an analyst at Standard & Poor's Equity Research.
Mr Hester insisted that ministers did not want to nationalise the bank but admitted it was possible. "The future is uncertain in lots of respects and that must be [an option]," he said. He gave a grim outlook for the economy and the banking sector, forecasting a transition from further credit market losses to rising bad debts from companies and households, which would be more predictable but no less damaging.
Mr Hester admitted that RBS faced political pressure to support the UK economy as he promised to lend to big British companies at 2007 levels. The extra capital raised by swapping the preference shares will be used to increase domestic lending by £6bn and the bank will be a "guinea pig" for the Government's new loan guarantee scheme, he added.
Sir Fred built an international banking giant spanning Europe, the US and Asia. As well as the ABN deal, RBS is writing off goodwill in Charter One, the US bank which was bought in 2004, prompting rumblings from investors that Sir Fred was empire-building. Mr Hester, who sold RBS's stake in Bank of China last week, said the Edinburgh-based bank would still be a global lender. However, he admitted: "We did expand too much outside the UK. Our strongest businesses are in the UK."
RBS will have to cut costs in all its markets as the economy shrinks and the business is scaled back, he added. Meanwhile, Gordon Brown criticised RBS for its past mistakes and said the ABN deal was "wrong". "Almost all their losses are in sub-prime mortgages in America and related to the acquisition of ABN Amro," the Prime Minister said. "These are irresponsible risks taken by the bank with people's money in the UK."
Sir Philip Hampton started at RBS as chairman-designate yesterday and will take over from Sir Tom McKillop in April. Mr Hester promised a further shake-up of a board which has been attacked for giving Sir Fred free rein. Johnny Cameron, the head of RBS's investment banking unit, has already stepped down and is likely to leave soon.