RBS hit by soaring debts

Rhian Nicholson
08.05.09 09:48

Soaring bad debts dealt Royal Bank of Scotland (RBS) a heavy blow in the first quarter of the year, as it posted a loss of £857 million.

The group, which is 70% owned by the taxpayer, reported a bottom-line loss of £857 million for the first three months of the years.

Bad debts climbed to £2.9 billion from £656 million a year ago amid soaring corporate and retail impairments.

However, the group also enjoyed record income during the quarter of £9.7 billion - mainly due to a strong performance at its global banking and markets division - and would have posted a £4 billion operating profit without the £4.9 billion writedown on bad debts and the plunging value of toxic assets.

Dividend payouts on Government preference shares, the effect of record low interest rates on margins and money due to partners on the sale of its Bank of China stake also widened losses at the bank.

Newly appointed chief executive Stephen Hester warned that further trouble lies ahead. He said: "We expect credit conditions to continue to deteriorate over the next few quarters consistent with these trends, and that there will be a slowdown in financial market activity compared with the very buoyant conditions seen in the first quarter.

"Some commentators are beginning to talk about economic recovery; we remain cautious and continue to plan and manage our businesses in the full expectation that both 2009 and 2010 will be very tough years for RBS."

RBS, which earlier this week announced the final stage of its management revamp, also revealed that it is still finalising details on which toxic assets will be included in insurance scheme. It announced plans to insure £300 billion of toxic assets earlier in the year in which it will be liable for the first £19.5 billion of potential losses.

The struggling group said it expected up to 85% of the impairments and credit market losses announced in today's results to count towards its first loss. This means it has already burnt through about £4 billion of its buffer.

Alex Potter of Collins Stewart said: "We assume RBS is loss-making for at least two years and see little meaningful profit before 2012."

Analysts expect Hester, who took over from Sir Fred Goodwin in November, to sell off more assets and unwind huge loan books to get the bank back on track.

However, Hester has warned that recovery will be a long, slow path. He said: "No one should be in any doubt that it is a process that will take years not months."

In 2008, the bank reported a loss of £24.1 billion - the largest ever annual corporate loss.

RBS hit by soaring debts

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