Published February 27, 2009

RBS posts biggest loss in UK business history

It parks £325b in asset protection scheme; will sell some operations

By NEIL BEHRMANN
IN LONDON

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THE Royal Bank of Scotland has declared by far the biggest loss in UK corporate history and the British government has extended its bailout by £25 billion (S$54.7 billion) to around £45 billion.

Shocking losses: The original RBS Group headquarters in Edinburgh. The bank reported net losses after tax and interest of £24.1 billion, which has been blamed on the decision of former CEO Fred Goodwin (next) to buy ABN Amro

RBS reported a £40 billion loss before tax and net losses after tax and interest amounted to £24.1 billion for the year ended December 2008.

The losses compared with a £9.8 billion pre-tax profit in 2007 and the disastrous results are from a £32.6 billion writedown of assets, mainly related to the reckless decision to purchase ABN Amro at the peak of the market.

The previous record annual loss for a UK company was £14.9 billion.

Despite the shocking report, RBS shares jumped by 6.6 pence, or 28.6 per cent, to 29.7 pence, compared with a peak of around 800 pence in 2007.

RBS will also place £325 billion into an 'asset protection scheme' of toxic poor performing loans, structured credits, derivatives and other suspect holdings.

The bank will be responsible for the first £19.5 billion of losses on the government asset insurance scheme. After the first loss on these poisonous assets, any further shortfall would be borne 90 per cent by the UK taxpayer and 10 per cent by RBS.

Lloyds Banking Group and Barclays bank are also expected to participate in the asset protection scheme.

The government will also buy B shares in RBS as part of its further £25 billion bailout. The B shares are convertible into ordinary shares if the ordinary share price recovers to more than 65 pence.

However, a clause has been inserted in the deal over-riding this conversion to prevent the government stake rising above 75 per cent.

The need for additional government capital was because of RBS's agreement to meet the first £19.5 billion of losses on assets put into the asset protection scheme.

'I don't want to kid you: this announcement is not a bonanza for shareholders, far from it. The only way of seeing future value for our shares is for us to be able to restructure ourselves,' said Stephen Hester, the new chief executive.

He added that the precise level of the government's shareholding will depend on exactly how much the bank injects into the toxic asset insurance scheme and its potential future losses. He said the government, which already owns 68 per cent, has capped its voting rights at 75 per cent, but depending on potential further problems, analysts estimate that the government's stake could rise above 90 per cent.

In return for this government aid, RBS agreed to increase lending to businesses and UK homeowners by £25 billion over the next 12 months, and a further £25 billion in 2010.

Chancellor Alistair Darling said: 'We want to ensure that by cleaning up the balance sheet, that by making sure RBS has enough capital, we can get through this period.'

Mr Hester added that 'participation in this scheme would assist us in reducing risk for shareholders whilst providing greater support for UK customers via increased lending'.

He also confirmed a report in The Business Times last week that the bank intends to sell its international operations, including some in Asia.

The bank will 'significantly' reduce its presence in or withdraw from 36 of the 54 countries in which it operates. Most of the business after those sales will be concentrated in the UK.

Mr Hester described the planned restructuring of the bank as 'sweeping', promising that no part of the bank would be left untouched with all businesses being set new targets and cost-cutting ambitions.

As many as 20,000 jobs could be lost after RBS said it planned to cut costs by £2.5 billion.

News of the bank's massive loss and further bailout follow the BBC's report on the scale of former chief executive Fred Goodwin's pension fund.

The BBC claimed that it was worth £16 million and that he would be drawing £650,000 a year.

Mr Goodwin's decision to buy ABN Amro has been blamed for causing the implosion of RBS. Treasury Minister Stephen Timms said the government was looking at ways of 'clawing back' his payments.

Derek Simpson, joint leader of Unite, a national union, said: 'These historic and humiliating losses bring into sharp focus just how recklessly RBS's former management team have behaved.

'The whole country is paying the price through job cuts and repossessions on a massive scale. It is time to take control and fully nationalise this bank.'