Global slump fears as RBS expected to reveal £1 billion loss

Date: 08 August 2008
By Lindsay McIntosh
SCOTTISH banking giant RBS is today expected to announce a record loss, precipitated by its £5.9 billion share of world banks' £250 billion write-downs – and last night experts warned the global financial crisis behind the slump will worsen.

The anticipated half-yearly results – a deficit of more than £1 billion – come just a year on from the start of the credit crunch and show how quickly boom has very nearly become a bust, creating losses that financiers say could exceed $1 trillion.

On 9 August, 2007, France's biggest bank, BNP Paribas, said it had been forced to suspend three of its funds with major exposure to bonds backed by US subprime mortgages. The knock-on effects were catastrophic, with governments forced to save the private sector, the bottom dropping out of the housing market, homebuilders announcing redundancies – and talk of a recession.

Fast forward a year and RBS is expected to unveil the biggest loss ever incurred by a British bank after the credit crunch forced it into a rights issue of £12 billion.

Analysts say the Edinburgh-based bank's write-downs are only the tip of the industry iceberg, with about $1 trillion to be declared before the crisis abates – which could take until of 2011, according to Citigroup. Colin McLean, managing director of SVM Asset Management, said: "My view is we will see more write-downs in the last quarter, then things will pick up. A view in the credit market is some of the US banks have been prudent in announcing write-downs, but some European banks haven't been so active."

David Bell, professor of economics at Stirling University, said the banking sector was facing "protracted difficulties" – and there would never be a return to the boom of last year.

He said: "It is difficult to guess how long for, but I would have thought that it's going to take another year, probably – and even then we are not going to return to a situation where credit is as easily available as it was just over a year ago.

"Obviously, the shutters have come down in the last year, but before that credit was too easily available. Then comes a period where it is very difficult and then we get an equilibrium."

RBS was hit by the same problems as the rest of the world, but it was more at risk following its takeover of ABN Amro and its exposure to the US subprime market.

Mr McLean said: "RBS is not in any worse a position than (other banks]. The key thing is whether it manages to sell the insurance side for the right price.

"At the moment, the sector is quite sceptical."

He said he believed RBS would have been affected by the current financial climate even without the ABN deal, but the fact it had used mainly cash to buy the Dutch bank had forced it to go cap in hand to shareholders.

Eric Spring, a stockbroker with Redmayne Bentley, said: "RBS had a protracted takeover of ABN Amro and I think the reality is they probably overpaid for it."

But he claimed the bank's position was "not quite as gloomy as it was a month ago". He said: "They got their rights issue away – albeit deeply discounted – and that has raised £12 billion to shore up the balance sheets.

"The market continued to fall on the back of their announcement. The timing of it was advantageous in that they got it out of the way before HBOS, which went below the assets, whereas RBS hovered just above it."

Of RBS's write-downs, £1.75 billion comes from the bank's exposure to monoline insurers, a further £1.25 billion from leveraged loans, £1.8 billion from asset-backed securities and £1.37 billion in US mortgages – although some is offset by profits.

Ken Murray, chairman of the analysts Blue Planet, said that over the next 12 months the write-downs would arise from bad debts in the corporate and mortgage sectors. He added: "While RBS will get through huge losses, at the end of that it is very difficult to see how it will get any growth. The worst is not over. There is more to come."

When does a write-down become a write-off?

EARLIER this year, RBS finance director Guy Whittaker and his auditors signed off £5.9 billion of write-downs – cash the bank glumly believed it could never see again.

He had already talked through the figures in detail with the board, in particular the chief executive, Sir Fred Goodwin.

The numbers had been reached after hundreds of staff had pored over the value of debts and loans in small parts of the business in the search for assets gone bad. They had passed their findings up the management chain to calculate the overall hit to be taken.

Like most of Britain's banks, RBS's write-downs are overwhelmingly related to exotic assets, linked to the global credit crunch. A substantial proportion of UK institutions' written-down assets have their origins in subprime mortgage lending to people with chequered credit histories in the United States.

Traditional corporate debts and home mortgage defaults are not included in the banks' write-downs. They are simply listed as "impairments".

Some observers think British banks may have over-erred on the side of caution in their write-downs. Others believe they have grasped the nettle.

The situation is complicated by each individual bank having slightly different calculations on what to include in their headline impairments figure.

The £5.2 billion write-down at HSBC was mainly related to losses from its book of US mortgages. The £1.1 billion at HBOS was largely various debt securities hit by the global credit crunch. Lloyds TSB's figure was £585 million, which was both assets exposed to the credit squeeze and investment write-downs in its insurance arm, including Scottish Widows.

The City also says British banks have been "kitchen-sinking" write-downs to try to get the bad news out of the way. In that way, they hope to go some way to repairing bombed-out share prices in the sector. Andy Hornby at HBOS even said a reasonable proportion of the adjustments may well end up coming back on to the bank's balance sheet. However, nobody is holding their breath for that to happen.