RBS announces further credit market hit

Royal Bank of Scotland (RBS), one of three British banks to receive capital injections under a £50 billion government bailout package, on Monday announced writedowns of £206 million of credit assets in the third quarter, following £5.9 billion of writedowns in the first half of the year.

Operating profits for the quarter, before writedowns, fell eight per cent over the same period last year. Profits were boosted by £1.2 billion due to a change in accounting rules that meant the bank no longer had to mark-to-market a number of formerly held-for-trading assets.

RBS said it expects impairment losses to rise in the fourth quarter due to the weak economic climate, which will “adversely affect” its full year results. The bank added that events linked to counterparty failures and sovereign risk have already lowered income since the end of September by £1 billion.

Deteriorating market conditions in the third quarter caused RBS’ non-performing loan ratio to increase from 1.47% at the end of June to 1.72% at the end of September, and its tier one capital ratio to fall from 8.6% to 7.9%.

In an attempt to boost its tier 1 ratio to 11.6%, RBS will sell £5 billion in preference shares to the Treasury and issue £15 billion in new ordinary shares to the public. The bank completed a £12 billion rights issue completed in June, but the change in conditions has forced it to seek further capital.

The ordinary shares will be issued at a rate of 18 new shares for every 13 existing shares, or at 65.5 pence each, and will be underwritten by the Treasury.

RBS will look to repurchase these shares as soon as possible, as no dividend may be paid on ordinary shares while the government has a stake.

The bank also said it has launched a strategic review to “refocus on its powerful group of stable, profitable customer franchises”. The review is “aimed at achieving appropriate risk-adjusted returns, reduced reliance on wholesale funding and lower exposure to capital-intensive businesses”.

As a result of the recent turmoil, RBS has seen a significant shake-up of senior management. Former chief executive officer Sir Fred Goodwin has already left, and chairman Sir Tom McKillop will step down next year.

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