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Economy

RBS suffers £691m loss

Written by Catherine Murray

Friday, 08 August 2008

The bank is humiliated by one of the largest pre-tax losses in UK history.

The Royal Bank of Scotland (RBS) posted today a pre-tax loss of £691 million in the first six months of 2008. The loss follows credit-market writedowns of £5.9 billion, which hit the bank after the credit crunch cut the value of many of its mortgages and assets.

The loss posted by RBS is its first in four decades and was blamed on “unprecedented market conditions in the number of [their] business lines”. Sir Fred Goodwin, chief executive of the RBS, admitted that the bank’s performance was not up to scratch.

"No one here thinks that these results are in any shape or form satisfactory. It has been a chastening experience and reporting a pre-tax loss of £691m is something I and my colleagues regret very much. This loss is a consequence of previously signalled writedowns on credit market exposures amounting to £5.9bn," Goodwin said.

The bank’s profits on an underlying basis fell to £5.1bn from £5.3bn in the first half of 2007 - - ignoring the massive credit crunch writedowns, one-off charges and integration costs.

Goodwin pledged to work hard to improve the bank’s level of performance, saying, “In response to these new market conditions we moved decisively to strengthen our capital position materially.”

“In so doing we are acutely aware that we drew heavily on our shareholders for financial support and we recognise that we must now deliver a level of performance that meets their expectations…” he added.

While RBS’s loss is less than expected by some analysts after their large writedowns on the value of risky assets, it is the second-biggest loss ever reported by a UK bank.

Lloyds TSB still holds the record after losing £715m in 1989. This is the first time RBS has fallen into the red in its 40 years as a public company.

Goodwin warned “the difficult conditions in the financial markets look set to be compounded by a deteriorating economic outlook, with consensus forecasts pointing to slowing growth in many countries.”

The bank’s main priority and main challenge is therefore to position their businesses to enable them to remain supportive of customers whilst operating within a risk appetite appropriate to market conditions, said Goodwin.

Robert Peston , the BBC's business editor, said in hisblog that RBS's undoing was that it had piled into toxic securities linked to the dire US sub-prime housing market - and its exposure to the poison was increased through the takeover of Dutch bank ABN Amro last year.

RBS's £5.1 billion credit market write-downs were therefore an almost "incomprehensibly" big figure, he said.

Goodwin took care to stress that he is confident of the current RBS team’s capabilities to handle the tough conditions, in a report by theguardian.co.uk .

"We are focused on very difficult market conditions. We are focused here very much on doing what's right for our shareholders and to steer the business through a difficult time," he said.

Goodwin added, "We have steered it through good times and we are going to steer it through these times."

RBS shares rose 2.7% in early trading today to 238.5 pence in London.

The RBS figures have rounded off a difficult week for British banks. HSBC reported a 29% drop in profits on Monday, and Northern Rock revealed that its stiff suffering with a loss of almost £600m a day earlier.

Barclays also joined the downward spiral with its reported profits down by a third in the first half of this year. Lloyds TSB and HBOS reported 70% drops in profits last week.