LONDON (Reuters) – A 5.9 billion pound ($11.4 billion) writedown on risky assets sent Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) to a first-half loss of 691 million pounds — better than feared, but still one of the biggest losses in British history.
RBS, Britain's second-biggest bank, said on Friday the loss was “a chastening experience” but it was building a comfortable capital cushion and sales of assets were going as planned, although tough financial and economic conditions would continue.
Fred Goodwin, RBS chief executive, said the bank was talking to “a number” of potential buyers for its insurance arm, which is valued at 5 to 6 billion pounds, but he was not reliant on a sale to reach higher capital targets.
By 0900 GMT RBS shares were up 2 percent at 238 pence, one of the top performing UK stocks, as analysts said its capital ratio came in higher than expected and underlying earnings were resilient in the face of faltering economies.
“It may have drawn a line under the big credit losses, the capital raising is done and there are synergies to come through from ABN … but the underlying business is reflecting a tough market, particularly in the United States,” said Mike Trippitt, analyst at Oriel Securities.
RBS swung to its first-ever reported loss from a 5.1 billion pound profit a year ago after being hit by the writedowns on credit products. This was in line with previous guidance but partially offset by an 812 million pound reduction in the value of debt it carries.
It had been expected to report a 1.2 billion pound loss, based on the average of five analysts' forecasts.
Goodwin said difficult conditions in financial markets were likely to be compounded by a deteriorating economic outlook.
“There are headwinds and they're not abating at this point, but we see business out there to be done with caution,” he said.
Bad debts on mortgages and other loans jumped 58 percent in the six months to 1.5 billion pounds, mainly due to charges in its Global Banking and Markets (GBM) investment bank arm and U.S. retail and commercial banking.
RBS has had a troubled year and in June it was forced to raise 12 billion pounds in the biggest-ever rights issue, to repair a balance sheet stretched by last year's purchase of parts of ABN AMRO and the writedowns.
Asked if he was the right person to lead the bank after some calls for him and his chairman to step down, Goodwin said: “I'm very focused on what we're doing here. We're focused on doing what's right … to steer the business through a difficult time.”
RBS, which has written down more than 8 billion pounds, has been one of the banks hardest hit by the credit crunch, but it is not alone.
A year in, banks have lost over $400 billion of assets tarnished by the U.S. subprime housing crisis, forcing them to raise billions from their own shareholders and outside investors. [nN07505337]
RBS said its core tier 1 capital ratio was 5.7 percent at the end of June and will be above 6 percent by the end of the year, even if it does not sell its insurance arm.
“Insurance is for sale, we would like to conclude a sale and we believe our disposal process is on track,” Goodwin said.
“But if we don't get the value we are looking for we are not going to sell and we are fairly confident of meeting our capital targets.”
RBS said its underlying profit fell 3 percent to 5.1 billion pounds and underlying income edged down 1 percent.
The riskier backdrop is allowing banks to push through higher charges, however, and RBS's net interest margin improved to 2.09 percent in the first half from 1.96 percent.
The bank said it had taken “decisive action” to deleverage as it cuts risk, especially in GBM.
By Steve Slater and Clara Ferreira-Marques
(Editing by David Cowell and Quentin Webb)