Royal Bank of Scotland posts huge loss, to form ’bad bank’

Bloomberg

Royal Bank of Scotland Group will put 325 billion pounds ($462 billion) of investments into a state insurance program and shift toxic assets to a new unit after posting the biggest loss in British history.

Edinburgh-based RBS, the largest bank controlled by the U.K. government, reported a net loss of 24.1 billion pounds, or 61 pence a share, compared with a profit of 7.3 billion pounds, or 75.7 pence, in the year-earlier period. The loss equals $34.2 billion.

The lender plans to transfer 540 billion pounds of assets, including derivatives and mortgage-backed securities, to the new division, mirroring the so-called bad bank created by Citigroup last month.

Prime Minister Gordon Brown’s government agreed to insure the distressed assets of British banks to boost capital, spur lending and jumpstart the economy, which shrank 1.5 percent in the fourth quarter.

"It draws a line under the problems of what we know is a very weakened business," said Julian Chillingworth, chief investment officer at London-based Rathbone Brothers, which manages $21 billion including shares of RBS and Lloyds. "The asset protection scheme is more generous to the banking sector than was previously thought."

Preference shares

In return for the insurance, RBS will pay a fee of 6.5 billion pounds over seven years in the form of preference shares. It will also increase lending to U.K. homeowners and businesses by 50 billion pounds over the next two years, the company said in a statement.

The bank will be responsible for the first 19.5 billion pounds of losses on the insured assets. The bank will cover 10 percent of any additional losses, with the Treasury responsible for the rest. The Treasury will also buy 13 billion pounds of the preference shares.

Shares of RBS have declined 40 percent this year, compared with a 23 percent drop in the five-member FTSE 350 Banks Index, amid concerns the bank may become fully nationalized. In the past month two analysts rated the stock a "buy," eight a "hold" and three a "sell," according to data compiled by Bloomberg.

The government currently owns 58 percent of RBS. The stake in voting shares may rise to 75 percent and the "economic interest will rise significantly further," Chief Executive Officer Stephen Hester said on a conference call with reporters.

The bank’s new "non-core" division will hold 240 billion pounds of third-party assets, 145 billion pounds of derivative balances and 155 billion pounds of "risky assets" the bank will wind down or sell over three to five years, RBS said. The bank will "significantly" reduce its presence in or withdraw from 36 of the 54 countries in which it operates.

Risky assets will fall by 144 billion pounds, the company said.

Massive job cuts

RBS will reduce costs by 2.5 billion pounds and remove 45 percent of capital deployed in its global banking and markets securities unit, the bank said in a statement. Job loses of 20,000 are "not irresponsible speculation," Hester said.

"The asset protection scheme will give us a measure of stability in a hostile economic environment," he said. "The key building blocks for RBS’s recovery are in place. That doesn’t mean we will recover."

Citigroup announced plans last month to split in two after the New York-based bank reported a record 2008 loss of $18.7 billion. CEO Vikram Pandit, undoing the legacy of former chief Sanford "Sandy" Weill, created Citicorp to house the New York-based company’s global bank; and Citi Holdings, for "non-core" assets, including $301 billion of mortgages, bonds, corporate loans and other assets that the U.S. government agreed in November to guarantee.

In another development, Lloyds Banking Group said it’s in talks with the U.K. Treasury on participating in the Government Asset Protection plan. The talks are ongoing and no terms have been agreed, Lloyds said.