RBS unveils further £206m writedown amid profit fall

Fears bank could post first ever full-year loss
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The Independent Online

Royal Bank of Scotland, already one of the banks worst-hit by the credit crunch, said yesterday that investors should expect more pain as it gave a gloomy outlook for the rest of the year, which could see it make its first loss.

The bank, which is raising £20bn with help from the Government to shore up its finances, said it wrote down more debt in the third quarter.

It will also conduct a review of operations that could lead to the sale or scaling back of "capital-intensive" businesses like its riskier wholesale banking operations to raise cash and focus on steadier activities.

RBS said operating profit fell 8 per cent in the third quarter. It also wrote down another £206m from credit market exposure, or £1.4bn including the £1.2bn it reclassified on to its balance sheet, adding to the £5.9bn it wrote down in the first half of the year.

Looking at the rest of 2008, the company sees little improvement.

"The group expects the economic slowdown, continuing dislocation in financial markets and measures to reduce risk on our balance sheet will adversely affect fourth-quarter and full-year results," it said. It also expects a rise in bad consumer loans and admitted it could post its first annual loss.

RBS has suffered hard from the credit crunch despite its large size because its balance sheet was already stretched by last year's victory over arch-rival Barclays in the multibillion-pound fight for the Dutch bank ABN Amro. That victory has come back to haunt RBS, as Barclays has been able to avoid taking the bailout offered to banks.

RBS accepted a package under which the Government will take £5bn in preference shares and underwrite another £15bn in ordinary shares offered to investors.

As well as the £20bn capital raising, under which the Government will get a majority stake in the bank if RBS shareholders fail to take up enough of the stock, the Edinburgh-based company is trying to raise cash by selling its insurance unit, which includes Churchill and Direct Line. That sale process, initiated six months ago, has been going anything but smoothly, with the weak dollar over most of the period making it difficult for US bidders to pay a full price and potential suitors such as Zurich Financial pulling out.

The US insurer Allstate, which is bidding for the whole business, is understood to be fighting it out with a joint bid by the buyout firm CVC and the insurer Swiss Re for a 51 per cent stake in the unit. RBS and CVC declined to comment on the matter.

RBS's chief-executive designate, Stephen Hester, said that several bidders remain in due diligence to buy all or part of the unit, but that "no deal has yet been reached".

The company plans to cut costs and will examine all its businesses to decide which to keep. Mr Hester said, however, that only the insurance unit is "currently" for sale.

RBS will initially use the business consultancy McKinsey – rather than investment banks – for the review, which could see it sell or scale down parts of its business. Mr Hester did not comment on which specific parts of the business were likely to be cut or sold. RBS expects the review to be done by June, and will provide a progress update with its full-year results in February.

Mr Hester is taking over from Sir Fred Goodwin, who announced his resignation last month along with the planned departure of chairman Sir Tom McKillop in April, as part of the UK bailout.

Shares in RBS ended flat at 65.2p.

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