RBS Posts Quarterly Loss on $5.5 Billion Provisions
By Jon Menon and Andrew MacAskill
Nov. 6 (Bloomberg) -- Royal Bank of Scotland Group Plc, Britain’s biggest government-controlled bank, had a third- quarter loss after 3.3 billion pounds ($5.5 billion) of provisions for bad loans and credit-market writedowns.
The net loss was 1.8 billion pounds, compared with a profit of 871 million pounds in the year-earlier period, the Edinburgh- based bank said today in a statement.
“RBS is still a recovering basket case, but it’s going in the right direction,” said John Smith, a fund manager at private bank Brown Shipley & Co. in Manchester, which manages about 2 billion pounds, including RBS shares. “The news was bad, but could have been worse.” The shares gained as much as 8.6 percent in London trading.
RBS is getting a total of 45.5 billion pounds in capital from the British taxpayer, making it the world’s most expensive bank bailout. This week, the 70 percent government-owned lender said it would sell its insurance assets, more than 300 U.K. branches, an investment banking division and a credit card payment unit to win EU approval for taxpayer aid.
“This will be a marathon and not a sprint,” Chief Executive Officer Stephen Hester said in a conference call with journalists today. He hoped RBS would be profitable in 2011. The bank has written down 10.8 billion pounds in the first nine months of 2009.
The bank gained 7.5 percent to 37.85 pence at 10:15 a.m., paring its 2009 loss to 23 percent. The FTSE 350 Banks Index rose 1.5 percent.
Costs Controlled
The operating loss narrowed to 1.5 billion pounds from 3.5 billion in the second quarter. This shows the bank is controlling costs and profiting on the difference between its borrowing costs and the amount it charges customers on loans, Smith said.
“I would much rather they really write down the bad loans and get on with what they need to do,” said Lothar Mentel, chief investment officer at Octopus Investments Ltd., which no longer hold RBS shares. “What we don’t want to have in the U.K. after this entire banking crisis is a Japanese situation where you have zombie banks,” he said in a Bloomberg Television interview.
The bank plans to insure 282 billion pounds of risky assets with the government after posting the biggest loss in U.K. corporate history last year.
Assets Increase
In August, Hester said results will be poor for another two years because of the recession and related bad loans and funding costs. It posted a loss of about 24 billion pounds last year. The bank plans to reduce a balance sheet that climbed to more than 2.2 trillion pounds, about 1 1/2 times Britain’s annual economic production, under Hester’s predecessor Fred Goodwin.
Balance sheet total assets rose 2 percent to 1.68 billion pounds, from the end of the first-half. The loan to deposit ratio declined to 138.8 percent. That compares with about 84 percent at HSBC Holdings Plc, Europe’s biggest bank, which lends less than it gains in customer deposits.
“I am a little bit surprised by the numbers, I didn’t expect it to be this bad,” said Ralph Silva, research director at Tower Group Plc. “The difference between the haves and the have-nots in U.K. banking seems to be increasing month over month, which is frightening because if it increases anymore the value of RBS will be zero.”
The bank has cut almost 20,000 jobs since Hester became CEO a year ago. Today he said the cuts were “more than halfway through.”
Toxic Assets
In February, RBS said it would transfer 540 billion pounds of toxic assets, including derivatives and commercial and residential property loans into a new unit to be wound down or sold over three to five years. About two thirds of the provisions were made in the “non-core” division, the company said today.
In the core unit Ulster Bank and Citizens in the U.S. are experiencing increased bad loan provisions, the bank said. Bad debts have probably “plateaued,” said Hester.
The bank may seek a flotation of its insurance unit after selling its other operations within four years, said Hester. It will probably take a year before the first sale, he said.
Asked whether he regretted taking on the CEO’s job, Hester replied, “No.”
To contact the reporter on this story: Jon Menon in London at jmenon1@bloomberg.net
Last Updated: November 6, 2009 05:19 EST
