Billions of losses loom for RBS and Lloyds

Could part of the RBS be sold to Abu Dhabi? Picture: Getty
Could part of the RBS be sold to Abu Dhabi? Picture: Getty
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THE markets will be looking for evidence that Royal Bank of Scotland and Lloyds Bank have turned the corner when they this week unveil further losses.

when they this week unveil further losses.

The two part-nationalised banks are expected to confirm more writedowns amid hopes that the worst of the financial crisis is behind them.

RBS chief executive Stephen Hester, halfway through a five-year turnaround of the group, will be quizzed on the cost implications of retrenchment at the investment banking division. It involves shedding £120 billion of funded assets, a withdrawal from activities such as corporate broking and cash equities, and more than 3,500 redundancies.

“What is happening at RBS’s global banking and markets (GBM) arm and, crucially, how much the restructuring will cost, will be a keen focus of attention. We would hope for detail,” said Simon Willis, banking analyst with broker Daniel Stewart.

Hester, who last month waived a near‑£1m bonus for 2011 following political and public uproar, is expected to tell the City that progress has been made in making RBS a healthy, “stand‑alone” financial institution again but “much still needs to be done”. He is likely to cite the significant asset sales that have cleaned up the balance sheet, including last month’s £4.6bn divestment of the aviation leasing business. However, the RBS boss is to admit that “significant economic headwinds” have slowed down recovery.

Lloyds chief executive Antonio Horta‑Osorio is also expected to stress “good progress” with his bank’s non-core asset disposal programme. These include treasury assets, self‑certification mortgages, and part of its distressed commercial property portfolio inherited from the 2009 acquisition of HBOS. The City also hopes that Horta‑Osorio’s first results presentation since his absence from exhaustion will provide some reassurance of continuity at the bank. Broker Societe Generale said in a note: “We think seeing the CEO present results will help the market move on from his leave of absence last year.”

However, the likely headline losses at Lloyds and RBS, owned 41 per cent and 83 per cent respectively by the taxpayer, are seen as still overshadowing their strategies for recovery.

The consensus City forecast for Lloyds is a £4bn loss after taking a £3.2bn hit on payment protection insurance (PPI) mis-selling, one of the first actions of Horta‑Osorio after taking over from Eric Daniels last spring. That compares with a small profit of more than £280m in 2010.

On an underlying combined Lloyds/HBOS business basis, excluding exceptional items such as restructuring costs, the group is expected to make a profit of £2bn, slightly down on a £2.2bn profit in 2010.

After taking an £850 million provision for PPI, RBS is likely to unveil a headline annual loss of up to £2bn, according to analysts. The loss in 2010 was £1.1bn.

In tough conditions for investment banks, with flotations and merger & acquisition activity largely drying up in the downturn, expectations are for a slump of 30 to 40 per cent in revenues at RBS’s GBM division.

Bad debts at Lloyds are expected to have fallen 25 per cent year‑on‑year to just shy of £10bn, but to be higher quarter‑on‑quarter due to fewer “lumpier” impairments in Q3. That bad debts reduction is forecast to be largely mirrored at RBS.