Bad debts haunt RBS

Royal Bank of Scotland (RBS) today revealed heavy third quarter losses with bad debts continuing to plague the part-nationalised bank.

Pre-tax losses stood at £2.1 billion for the three months to September compared to a profit of £1.9 billion in the same period in 2008 before it fell into the Government's arms.

However, the bank's third-quarter operating loss more than halved to £1.5 billion pounds from the previous quarter.

Bad debts almost tripled in the period from the third quarter last year to £3.3 billion - but down from the £4.7 billion reported last quarter. Over the nine month period, write-offs on bad loans have risen to £10.8 billion from £2.7 billion in the same period last year. 

Chief executive Stephen Hester warned that bad loans are to "remain at elevated levels for the next few quarters" which, along with writedowns are "likely to drive a continuing overall loss next year."

He said: "The results also show the headwinds we face and the legacy we are purposefully working out of. As I have repeatedly said, the journey will take some years." 

"Economic recovery is likely to be slow and the pain of economic adjustment will take years to subside. Our business will reflect these issues. Profitability in our core businesses will recover fully only when our own actions are also complemented by more normal interest rates and bad debt experience," he added. 

RBS saw its operating profit for global banking and markets fell from £1.1 billion to £375 million as the 'exceptionally strong' conditions from the first and second quarters eased. This is in contrast to rivals Goldman Sachs, BNP Paribas and Credit Suisse who saw their results lifted by strong performances from their investment banking operations.

Losses also worsened at its Ulster Bank and US retail and commercial operations as impairment charges continued to climb.

David Buik of BGC Partners says: "Today's interim results make dire reading. With a £1.8 billion loss plus provisions for bad debt totalling £3.3 billion, I think the market feels uncomfortable with this drip, drip, drip syndrome of further bad debts." 

Jonathan Jackson of Killik & Co adds: "The third quarter has shown a number of encouraging trends. However, we remain cautious over the outlook for the group given economic recovery is forecast to be slow, unemployment is expected to continue to rise and the recently announced forced disposals were greater than expected. 

"As a result, RBS's recovery is likely to take many years. Given the complexity of the capital structure, particularly following the APS, we struggle to recommend the shares." 

For more on RBS check out our new iBall TV episode on the crisis Bank

Earlier this week the bank became the most bailed out in the world after receiving an additional £33.5 billion - of which £8 billion is a pot of reserves intended for emergencies only - in state funding.

However, even Chancellor Alistair Darling warned that this may not be enough to save the bank. It is now 84% owned by the taxpayer.

It will sell off 318 branches in the UK - equating to 14% of its branch network to meet EU demands for receiving the state aid.
 
This will include its RBS branch network in England and Wales - originally Williams & Glyn's -and its NatWest brand in Scotland.
 
Additionally, it will offload its card payment business RBS Insurance and Global Merchant Services and its stake in commodities trader RBS Sempra Commodities.

It will also take part in the government's asset protection scheme under better terms that "improve incentives and deliver better risk-sharing with the private sector."

It will now insure £282 billion rather than the initial £325 billion agreed back in February following an improvement in market conditions. This will take the taxpayer stake in the bank to 84% from 70%.

Shareholders writing on Interactive Investor's RBS discussion board were bracing themselves for a rough ride.

Popes11 says: 'Things seem to be going from terrible to bad. On balance things are getting better. I watched RBS for years it's amazing to see the state they have gotten into over the last year. Still I'm holding as I'm hoping things can only get better.

Painkiller adds: 'Just because a company does not turn a profit does not make it totally useless, especially when said company already told you that this is what they expected.
'It's a risk share gamble on a long term recovery, in other words if you buy today (theres no rush) you should see a great return in 10-20 yrs, it probably really will be that slow to get a "ten bagger" with probably some divis down the line.'