Pressure on as RBS faces record losses

Published on Saturday 2 August 2008 15:37

ROYAL Bank of Scotland is expected to unveil the biggest loss in British banking history this week, adding to pressure for changes on the board.

The City expects the bank to fall to a first-half deficit of about 1.2bn with the most pessimistic being analysts at Merrill Lynch who believe it could exceed 1.7bn.

The rising cost of the credit fall-out is bound to intensify calls for a boardroom shake-up as the company also struggles to offload key assets.

RBS needs to raise 4bn from disposals in order to meet requirements on capital reserves. Last week it raised 950m from the sale of its half of the Tesco Personal Finance venture and has also sold Angel Trains.

The sale of its insurance businesses – Direct Line and Churchill – is still expected to go through later this year, with Allstate, the US insurer expected to join Allianz and Travelers among first round bidders. But bidders are failing to meet RBS's 7bn asking price which at 12 times earnings is twice the industry average.

Analysts say that chief executive Sir Fred Goodwin originally hoped to announce the sale with this week's half-year results in order to ease pressure on himself and chairman Sir Tom McKillop.

RBS is hunting for three non-executive directors and some believe that a senior non-executive will be appointed to replace McKillop.

On asset sales, Credit Suisse questions whether RBS will achieve the 4bn of gains from disposals and is keen to learn of any deterioration in the commercial property portfolio in which the bank is exposed by up to 60bn.

The bank's three-way acquisition of ABN Amro last year will once again be questioned as the expected synergies look less certain. RBS took a 2.5bn hit from the credit crunch last year and at the time of the rights issue revealed a further 5.9bn of investment writedowns from risky US property-related assets.

RBS insisted in April that its underlying performance had remained satisfactory and analysts are expecting underlying pre-tax profits – stripping out writedowns – of 4.9bn for the first six months of the year. Statutory results, however, are thought to have sunk to a loss after this year's writedowns.

Goodwin and McKillop will point to the success of the bank's record 12bn rights issue as a measure of investor support, but they will be quizzed about the need to raise further capital over the next year.

With Lloyds, HBOS and Alliance & Leicester reporting big falls in profit last week, tomorrow will see HSBC reveal the extent of its exposure to the credit crisis. HSBC has suffered more than its peers amid the market woes through direct exposure to America's sub-prime mortgage sector via HFC, its US consumer lending arm.

Britain's biggest bank has written down $23bn (11.6bn) on bad debts and losses on investments hit by the credit crunch.

The market expects interim pre-tax profits to fall by between 18% and 37%, with forecasts ranging from $8.95bn to $11.68bn (4.53bn to 5.91bn).

On Thursday, Barclays is expected to show "significantly depleted earnings" at its investment banking arm, according to Citi.