RBS takes £142m hit on Greek bond portfolio

The spectre of sovereign debt has cast a shadow on the Royal Bank of Scotland's latest results

The spectre of the sovereign debt crisis cast a pall over Royal Bank of Scotland's third-quarter results yesterday when the bank admitted that it had taken more hits on its Greek bond portfolio and had sold most of its Italian debt.

The bank, 83 per cent owned by taxpayers, took a loss of £142m on its Greek exposure for the three months to the end of September, marking the value of the bonds down to 37 per cent of face value. That is lower than the 50 per cent "hair cut" agreed under an EU bailout plan.

Holdings of government debt from Italy, Portugal, Greece, Spain and Ireland, where RBS has a big business and losses are still rising, fell to £772m from £4bn at the start of the year.

Mr Hester said he was not so much worried about Greece as he was about the far bigger economies of Italy and Spain. He said: "We want to make sure our exposures are very modest. My own view is that the action here is really all about Italy and Spain. That is the important place and what they do in respect of their own economies and what the broader world does in [terms of] safety nets are the important things, not what Greece does."

Mr Hester, halfway through a five-year turnaround plan, said trading conditions were "very challenging" and the crisis meant the bank's recovery would be "bumpier" than he had originally hoped.

RBS reported an operating profit of £267m for the three months to the end of September, 63 per cent down on the previous year. Income fell 18 per cent to £6.4bn. Pre-tax profits, flattered by accounting quirks, were £2bn versus a £1.6bn loss in the same period last year.

On the plus side, loan impairments fell sharply to £1.54bn, £728m lower than the previous quarter. However, the going was tough for Royal Bank's investment bank – which has been halved in size since Mr Hester took over. It was barely profitable as income plummeted by 29 per cent to £1.1bn, with the cost to income ratio surging to 93 per cent.

Mr Hester admitted that no money had been set aside for bonuses during the quarter and this was the first time this had happened in his three-year tenure. Further downsizing and job cuts are planned.

But he said RBS Investment Bank did no worse than rivals and defended its place in the group. "Our investment bank is not doing well. It is suffering from poor market conditions. We will continue to take action on costs. Since I came here, though, it has generated more than £10bn in profits that otherwise would have been lost to the tax payer."

He also said the bank was "exceeding our so-called stretch targets" under the Project Merlin lending deal with the Government. But he said the deteriorating economy could see a loan slowdown: "Our run rate has improved. I'm not sure we will keep that up."

Despite the gloomy outlook, the results were still well received by analysts in the City and the share price closed up 1.27 per cent at 23.09p.

G20: The Key Banks

RBS was among the 29 banks named at the Group of 20 meeting in Cannes yesterday as being so important to the global financial system that they will be required to hold more capital than rivals. The 29 must also, by the end of next year, have in place a plan to allow them to be wound up without taxpayer help. The other "big four" UK banks – Barclays, HSBC and Lloyds – are also named, alongside eight US banks, including Goldman Sachs and Citigroup, 10 eurozone banks and just four from Asia, including Bank of China. Switzerland's UBS and Credit Suisse and Nordea complete the list, which will be reviewed annually.