MercoPress. South Atlantic News Agency

UK banks perform poorly and anticipate tougher times ahead

Royal Bank of Scotland (RBS) has posted a pre-tax loss of £691m during the first six months of 2008, the second-biggest loss in UK banking history.

RBS, which owns NatWest bank, said it was hit by £5.9bn of write-downs after the credit crunch cut the value of many of its mortgages and assets. The bank made a profit of £5bn during the same period last year. RBS statement follows Barclays earlier announcement that it had seen pre-tax profits drop 33% in the first half of 2008 following more credit crunch related write-downs. The bank made £2.75bn, down from £4.1bn, which it said was "acutely disappointing" but which beat many analysts' expectations. The fall in profits was less than that seen by most of its competitors. Barclays said it had taken charges of £2.45bn for bad debts, including exposure to US sub-prime mortgages and other credit market problems. RBS boss Fred Goodwin warned that a "deteriorating economic outlook" would compound problems in financial markets. RBS had been expected to post a much larger loss with some analysts predicting the UK's second-biggest bank could see a loss of between £1.2bn and £1.7bn. The company's shares added 2.7% to 239.25 pence in London. Sir Fred said the losses had been a "chastening experience", and that reporting a shortfall of £691m was something he and his colleagues "regret very much". At a press conference he said that the write-downs created, "a very unsatisfactory situation, made more so by the shadow it casts over the good performances across a wide range of our businesses". Much of RBS's write-down total stem from investments at Dutch bank ABN Amro bought by RBS and partners last year. RBS, along with other UK and global banks, has suffered from a drop in the value of risky assets, particularly those linked to US sub-prime mortgages. Sub-prime borrowers are those with poor or non-existent credit histories, and in recent months the number of defaults has jumped. As a result of the problems in the US and other global financial markets, many lenders have had to find ways of boosting their cash reserves, with many deciding to sell shares to existing investors via a right issue. Declared write downs from major financial institutions so far include, in billion US dollars: Citigroup, 46.4; Merrill Lynch, 36.8; UBS, 36.7; AIG, 20.2; HSBC, 18.7; RBS, 16.5; IKB, 14.7; Bank of America, 14.6; Morgan Stanley, 11.7; Deutsche Bank, 11.4; Ambac, 9.2; Barclays, 9.2; Wachovia, 8.9; MBIA, 8.4; Credit Suisse 8.1; Washington Mutual 8.1; HBOS, 7.5 billion. RBS sold shares worth £12bn in a rights issue that was strongly supported by shareholders, who agreed to buy some 95% of the stock on offer. The rights issue was the biggest in UK corporate history, and the firm said investors would take up 5.8bn new shares at a value of 200 pence each. Following the rights issues, RBS said that its core tier 1 capital ratio, a key measure of cash and asset levels, was now 5.7%. Referring to the current economic difficulties, Sir Fred said the bank had "moved decisively" and had drawn heavily on its shareholders for financial support. "We recognise that we must now deliver a level of performance that meets their expectations for the company and restores value to our shares. We are determined to do so, and this is our focus," Sir Fred added. Barclay's CEO John Yarley also pointed out that "it would be wrong... to suggest that the market conditions over the foreseeable future will be anything other than tough; that means that we must remain very vigilant to managing risk." He added that some parts of the business "may take quite some time" to return to the profitability of previous years. The £2.45bn of charges in the first six months of 2008 compared with £959m of write-downs in the same period a year ago. Barclays' investment banking arm - Barclays Capital - saw profits fall 68% to £524m, after it took nearly £2bn in write-downs as a result of the credit crunch Barclays has 11.5 million UK customer accounts, and 786,000 mortgage accounts. At its credit card operation Barclaycard, bad debt charges increased 10%, partly because of its recent purchase of Goldfish. Barclays recently raised £4.5bn from investors to boost its balance sheet. The bulk of shares were sold to major overseas and institutional investors, led by Qatar, China and Singapore.