Royal Bank losses to be felt in every area of city

Published on Friday 8 August 2008 10:27

ROYAL Bank of Scotland today announced the second-biggest loss ever recorded by a UK bank.

The Edinburgh-based financial heavyweight recorded losses of 692 million in the first half of this year, compared to a 5bn profit at this time last year.

It comes only six months after the bank was breaking records by posting the biggest profits ever recorded by a Scottish company, making more than 10 billion in a year.

Chief executive Sir Fred Goodwin today said that the loss was a "chastening experience" for the bank that the board "regret very much".

And there are concerns that the extent of the losses could have an impact on the whole economy of the city.

Despite being lower than the forecast 1bn-1.5bn losses, today's results will increase anxiety among the firm's 9000 Edinburgh employees. The bank, the city's third-biggest employer and biggest private sector employer, has already cut jobs on a group-wide basis.

Sir Fred said: "The first half of 2008 has been as difficult an operating environment as we have encountered for some time, presenting both general and specific challenges to RBS.

"The results we have published today demonstrate progress in a number of important areas, and it is all the more unsatisfactory, therefore, that they record a loss as a result of our credit market write-downs.

"We are determined to ensure that the inherent strengths of the group's diverse business model are not obscured in this way again."

He added: "It has been a chastening experience and reporting a pre-tax loss of 692m is something I and my colleagues regret very much."

The results will also heap pressure on Sir Fred and the bank's under-pressure chairman, Sir Tom McKillop, below.

Banking analyst Ralph Silva, from the Tower Group, said: "I do feel there will be some victims.

"Maybe the chairman, Sir Tom McKillop, probably will be the one that will have to fall on his sword, and simply because the CEO, Sir Fred Goodwin ... removing him would be too disruptive to the organisation at this time and it's just not responsible to do so.

"So if the investors want someone's head they will probably go after the chairman's."

The main reason the Royal Bank is feeling a greater strain than its competitors is the performance of the former ABN Amro assets which it bought at such huge cost last year.

Analysts were already warning about the economic downturn ahead when RBS led a consortium of firms that bought the Dutch lender for 49 billion last October.

Since then its share price has plummeted by two-thirds as the credit crunch continues to bite.

But Bryan Johnston, an analyst at Edinburgh-based investment manager Bell Lawrie, said things may not be as gloomy as they look on the surface.

"So much of the bad news was already in the public domain. And it is not necessarily losses, it is non-performing assets, that are causing these figures and they may come back on in the coming years," he said.

"It is difficult to see exactly how exposed it is. In many ways, banks estimate the worst so it can be better than it appears."

Mr Johnston does not expect the results to force Sir Tom and Sir Fred to stand down. "The shareholders are disgruntled but there is no point kicking out the board. They got it into this mess so they can get it out," he said.

Outside the banking world, it is the building industry that has most to fear from today's results.

The bank is a major supporter of the building industry, with investments in a number of developers in the city, as well as being one of the foremost lenders to those firms.

It is part of a consortium of firms that has ordered a review of part of the giant mixed use Springside development at Fountainbridge.

Stewart Taylor, director of property firm CB Richard Ellis' business space consultancy, fears the impact of today's losses will soon be felt across the whole city property market.

He said: "RBS has a significant equity stake in a number of developers in Edinburgh and we know that they are already under pressure from RBS to release some of their capital, sell assets and cut costs. That is very visible at the moment when talking to developers. Some have absolutely no appetite at all to buy or build.

"If RBS is making losses and cutting costs, then they will want to pass on some of the pain to these firms. The second half of the year will be very difficult for a number of people. Nobody will be buying land, schemes will be put on ice and the whole market in the city will be very sluggish."

But Ron Hewitt, chief executive of the Edinburgh Chamber of Commerce, is confident that the huge losses represent only a "temporary blip".

He said: "Inevitably, there is a fear that if a business comes under increasing pressure it will look to cut its cost base. We hope that will not happen here because the Royal Bank has proven itself to be a front-runner.

"Hopefully, in taking the hit this year, they will be clearing the way to do well in the future."

Despite fears that low confidence in the economy could affect jobs investment, Mr Hewitt said: "We have no fundamental concerns in the Scottish economy. Of course staff, like everybody, will be concerned about the performance and financial situation."

Wisdom of 49bn Amro deal comes under scrutiny

A VIDEO that played before April's annual general meeting of RBS shareholders in the Edinburgh International Conference Centre played heavy on the company's Scottish identity in a global marketplace.

There are few countries that you will not stumble upon the RBS logo following a massive expansion over the last two decades.

The bank, whose origins can be traced back to the disastrous Darien Scheme, slowly increased its presence before exploding into action as a global giant in 2000 with the 21 billion acquisition of Natwest.

In the following six years, the bank, led by chief executive Sir Fred Goodwin and Sir Tom McKillop, then made 23 different acquisitions.

And while it had already become a global corporate leader, last year's move with Fortis and Santander to buy up ABN Amro for 49bn was the world's biggest ever banking deal.

But since then, there have been questions among some institutional shareholders about its strategy, and the timing of the deal.

In April it made history again, unveiling the UK's biggest banking rights issue after calling for 12bn from shareholders to plug the credit crunch gap.

It is also in the process of carrying out a "strategic review" of its insurance arm, including Churchill and Direct Line.

Credit crunch bites into finance giants

ROYAL Bank of Scotland has become only the latest of several major UK banking giants to unveil the extent that it is suffering from the credit crunch.

Lloyds TSB was first up last week, announcing that 70 per cent of its profits were wiped away in the first half of the year after a further 585m credit crunch hit.

RBS's Edinburgh rival Halifax Bank of Scotland said its underlying profits in the first half of the year had more than halved to 1.31 billion, largely because of a 1.1bn credit crunch hit.

Alliance & Leicester then rounded off a gloomy week with pre-tax profits falling 99 per cent to only 2m.

The gloom continued into this week, with HSBC announcing a 28 per cent decline in half year profits to 5.2bn as it lamented the "most difficult market for decades."

And yesterday, Barclays said its pre-tax profits were at 2.75 billion for the first half of 2008, down 33 per cent on the first half last year.

However, RBS has proven to be the worst hit in the UK banking sector with its record-breaking loss today.

'No surprises' at 48 per cent hike in home repossessionsHOME repossessions have increased by 48 per cent, according to figures published by the Council of Mortgage Lenders today.

In the first six months of this year, 18,900 UK homes were repossessed, compared to 12,800 in the first half of 2007, and 13,400 between July and December 2007.

The repossession rate, at 0.16 per cent nationally, is at a ten-year high, but the CML has stressed that this is still low in the context of 11.74 million mortgages in the UK, and is less than half that experienced during the housing market crash of the early 1990s.

The CML says the data shows "no surprises" and estimates 45,000 people will lose their homes this year.

Today's figures also reveal that the number of mortgages in arrears by three months or more has risen by 29 per cent to 155,600 at the end of June.

The CML predicts that 170,000 mortgages will be in arrears of more than three months by the end of the year.

The Financial Services Authority fired a warning shot to lenders earlier this week after finding that specialist mortgage firms were "too ready" to take court action against borrowers.

The Government can step in to help after nine months, but housing charity Shelter said this is too late to prevent many from losing their homes.

Chief executive Adam Sampson said: "Behind these figures are thousands of families facing sleepless nights worrying about how to make their next mortgage payment, and many thousands more will be waking up to the frightening reality of repossession.

"Government urgently needs to step in to prevent thousands more families from losing their homes."

SCOTTISH IDENTITY WITH GLOBAL STATUS

A VIDEO that played before April's annual general meeting of RBS shareholders in the Edinburgh International Conference Centre played heavy on the company's Scottish identity in a global marketplace.

There are few countries that you will not stumble upon the RBS logo following a massive expansion over the last two decades.

The bank slowly increased its presence before exploding into action as a global giant in 2000 with the 21 billion acquisition of Natwest.

In the following six years, the bank, led by chief executive Sir Fred Goodwin and Sir Tom McKillop, then made 23 different acquisitions.

And while it had already become a global corporate leader, last year's move with Fortis and Santander to buy up ABN Amro for 49bn was the world's biggest ever banking deal.

But since then, there have been questions among some institutional shareholders about its strategy, and the timing of the deal.

In April it made history again, unveiling the UK's biggest banking rights issue after calling for 12bn from shareholders to plug the gap.

I'm the man for the job says Sir Fred

RBS chief executive Sir Fred Goodwin today insisted that he remained the best man for the bank's top job, despite its 692 million loss.

Sir Fred, who asked shareholders for 12 billion in April to shore up the group's balance sheet, insisted the management team, which includes chairman Sir Tom McKillop, was best placed to bring the bank through the "very difficult market conditions".

"We are focused here very much on doing what's right for our shareholders and to steer the business through a difficult time," Sir Fred said.

"We have steered it through good times and we are going to steer it through these times."

Broker Citi said RBS's results were ahead of market estimates.