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RBS €27 billion loss is biggest ever for UK company

Video by Gulliver CRAGG

Latest update : 2009-02-26

The Royal Bank of Scotland has reported a net loss of 24.1 billion pounds (34 billion dollars, 27 billion euros) in 2008, the largest shortfall ever recorded by a British company. The bank now plans to re-focus its activities on the British market.

AFP - The Royal Bank of Scotland reported Thursday a net loss of 24.1 billion pounds (34 billion dollars, 27 billion euros) in 2008 -- the largest in British corporate history -- because of the credit crunch.
The disastrous results for the embattled bank, 70-percent owned by the state after a massive bailout in the wake of the global credit squeeze, contrasted with a net profit of 6.8 billion pounds in 2007.
The British government has agreed to insure RBS "toxic" assets worth 325 billion pounds in its Asset Protection Scheme (APS) and will cover 90 percent of losses stemming from such holdings, the group added.
RBS was hit particularly hard last year by its leading role in the record-breaking consortium purchase of Dutch lender ABN Amro in 2007 before the worldwide credit crunch ravaged the banking sector.
"We owe our continued independence to the UK government and taxpayers and are very thankful for their support," said chairman Philip Hampton in a results statement.
"The external environment has seen unprecedented turbulence in bank and other financial markets and deteriorating economic conditions around the world.
"Our disappointing financial results reflect these circumstances and our exposure to them."
The bank said it will sell off and withdraw or reduce operations in 36 countries to re-focus activities on the domestic market.
In addition, the group will split into two parts, hiving off its riskier holdings into a "non-core" division of assets worth around 540 billion pounds that will be wound down over the next five years.
RBS, which has already taken 20 billion pounds of government funds, will raise another 13 billion pounds of state money in return for more shares.
The government's shareholding, in terms of votes, will be capped at 75 percent but RBS chief executive Stephen Hester said the state's economic interest in the group could rise as high as 95 percent -- bringing it close to full nationalisation.
The bank said it was forced to write off 16.2 billion pounds in 2008 on the disastrous acquisition of ABN Amro at the top of the market.
The gigantic annual loss followed a catastrophic year when the financial crisis, driven deeper by the failure of US investment bank Lehman Brothers in September, brought RBS to the brink of collapse.
The group will also pay 6.5 billion pounds to take part in the Asset Protection Scheme, aimed at stimulating bank lending in recession-hit Britain.
In return for its participation, RBS will commit to lend 25 billion pounds to British consumers and businesses this year and a similar amount in 2010.
In morning trade, the share price jumped 27.71 percent to 29.50 pence on London's FTSE 100 index of leading shares which was up 2.11 percent as investors cheered the results, which were better than a feared 28 billion pound loss, and the toxic assets plan.
"The stock is likely to bounce on the back of this announcement as the terms of the APS are materially more lenient than expected," NCB analysts wrote in a note to clients.
It also emerged that RBS's former chief executive Fred Goodwin, who is widely credited with leading the bank into disaster, has begun drawing a pension worth 650,000 pounds a year despite being just 50 years old.
Hester, Goodwin's successor, announced plans to cut 2.5 billion pounds in costs across RBS by 2011 as he battles to restore the group to health, saying this would "regrettably" led to more job losses.
Reports have suggested that up to 20,000 jobs could go.
Most of the divisions and assets to be sold off will be in RBS' investment banking division. The bank will withdraw or radically reduce its operations in 36 of the 54 countries in which it operates.
Hester said his "primary task" was to rebuild the bank's strength so the government can sell down its shareholding in the coming years.
But he warned: "To make any forecast is hazardous, beyond the expectation that 2009 will be a very tough year for the world economy."
British finance minister Alistair Darling defended the government's approach of providing backing for the toxic assets, saying: "What we're doing is recognising that the banks need to clean up their balance sheet."
Darling said Goodwin's pension was unacceptable and he had formally asked him to forego the 16-million-pound package.
"People will find it very hard to understand that you can be paid 650,000 pounds a year for the rest of your life when just look at the state RBS is in," he told BBC radio.

Date created : 2009-02-26