RBS struggles to meet loan targets as firms opt to pay off debt

Published on Friday 7 August 2009 21:41

ROYAL Bank of Scotland admitted yesterday that it was struggling to meet business lending targets amid threats that the situation will be exacerbated by a European Commission clampdown on the bank's market share in the area.

Stephen Hester, group chief executive, said many businesses were choosing to pay down debt in the recession, rather than take on more loans.

He said: "Insolvencies are happening because of the economy. People are selling less goods. Lending comes a long way under that (as a cause of insolvency]."

It came as the bank edged back into the black with a 15 million first-half underlying profit, compared with a 726m loss at this time last year.

However, after bad debts and write-downs soaring to 7.5 billion (2008: 1.5bn), and other items such as 543m of dividends on preference shares held by the government, the loss to shareholders in the six months is 1bn (827m loss).

RBS – 70 per cent owned by the taxpayer – has agreed to make an extra 25bn available to businesses and homeowners as a condition of state support.

Hester said that while the bank was "over-achieving" on its mortgage lending, where foreign banks had left the market, they had not left the small business lending market and there was no gap to fill.

The bank's comments come after Bank of England figures this week showed a 14.7bn fall in loans to businesses between April and June.

Hester said RBS was "open for business", but added: "Just as we have lent money, a lot of people have paid us back."

While the firm made 28.6bn in gross loans to business during the first half, but net lending was down 7.3bn because customers paid back more.

He said loan applications from small business were down 37 per cent, although the bank still made 100,000 business loans with an 85 per cent acceptance rate among smaller firms.

Hester added: "Demand has been comparatively muted, with companies cutting inventories and expansion plans and reducing their bank borrowing requirements.

"In the absence of a more general recovery in borrowing appetite, the targets will remain challenging."

In a letter to shareholders, Hester said the European Commission's approval of state aid for the bank was "likely to require weakening of our core UK banking franchise, especially for business customers".

He said that if this transpired, then the bank would try to minimise disruption to business customers. Hester said RBS's talks with the EC on the topic were about "what is the art of the do-able and the sensible", and some clarity was expected by the autumn.

RBS's share of small and medium-sized business lending is between 20 and 30 per cent depending on criteria used.

RBS yesterday named Bruce Van Saun as its new chief financial officer. He held the same position at Bank of New York Mellon.