Page last updated at 14:58 GMT, Thursday, 26 February 2009

RBS reports record corporate loss

RBS logo
RBS said 2009 would be another tough year for the bank

Royal Bank of Scotland (RBS) has announced the largest annual loss in UK corporate history and is to receive a further 13bn of taxpayers' cash.

RBS said that its 2008 loss totalled 24.1bn ($34.2bn).

It also said it would put 325bn of toxic assets into a scheme that offers insurance for any further losses.

RBS is under fire over the pension of former boss Sir Fred Goodwin and the government is looking into whether some of the pension can be clawed back.

'Sweeping' changes

Speaking at a news conference, RBS chief executive Stephen Hester said the bank was "under no illusions" about the scale of the losses.

He added that it was important "to think about the past, to know what went wrong, to disclose it and to address those issues".

Gordon Brown said nobody can support 'extensive pension arrangements' at this time

The day's key developments include:

  • RBS said it would make "sweeping" changes to its structure following the loss and did not rule out substantial job cuts
  • It will put 325bn of toxic assets into a new government insurance programme. RBS will be responsible for the first 19.5bn of any losses on the insured assets and pay 6.5bn to take part in the scheme
  • The government will inject 13bn into RBS to strengthen its balance sheet on top of the 20bn the government already injected into RBS last year. The bank will have access to another 6bn should it need it.
  • The bulk of RBS's 24.1bn loss for 2008 stemmed from a 16.2bn write-down of assets, which was mainly linked to its purchase of ABN Amro.

'Unprecedented turbulence'

RBS chairman Sir Philip Hampton blamed the loss on "unprecedented turbulence" in financial markets and warned that 2009 would be another tough year for the 282-year-old bank.

We are extremely frustrated by the lack of clarity over the company's restructuring proposals
Derek Simpson, Unite's joint general secretary

The bulk of RBS's 24.1bn losses came as made a 16.2bn write-down on poorly performing assets, mainly resulting from expensive acquisitions made during the height of the boom.

RBS's former chairman Sir Tom McKillop has acknowledged that its 2007 decision to buy Dutch bank ABN Amro, which was heavily exposed to the sub-prime crisis, was a "bad mistake".

US bank Charter One, which it bought in 2004, has also experienced problems.

RBS said underlying losses totalled 7.9bn.

Prior to RBS's announcement, the biggest annual loss of any UK corporation was the 14.9bn loss reported by Vodafone in 2006.

Pension controversy

RBS is under heavy criticism after the BBC learnt that Sir Fred Goodwin, the bank's former chief executive, is already drawing a pension of 650,000 a year, despite only being 50.

Stephen Hester, RBS's new chief executive, said that the pension arrangements for his predecessor came under a legal agreement that the government was part of.

"I understand this is legally binding on all parties," he said.

WHAT IS A WRITE-DOWN?
Reducing the value of an asset on a company's accounts to reflect a fall in its market value

However, Chancellor Alistair Darling said that government lawyers were looking to see what could be done to claw back some or all of the pension and called on Sir Fred to forgo his pension.

"You cannot justify these excesses when you have a failure of this magnitude," he said.

"On a voluntary basis Sir Fred could resolve this," he added.

Shadow chancellor George Osborne called for the government to reveal how much it knew about Sir Fred's pension deal.

"Whichever way one looks at it, this obscene pension is unacceptable and the government is on the hook," Mr Osborne said.

"Either they did know and failed to act, or didn't know and failed to ask the right questions."

'Cleaning up'

RBS, which runs NatWest, said it would pay 6.5bn to the Treasury to take part in the Asset Protection Scheme.

The scheme, backed by taxpayers, aims to strengthen bank balance sheets and encourage banks to lend more to firms and individuals.

Prime Minister Gordon Brown said the scheme would help clean up bank balance sheets.

"We need to clean up to ensure banks lend to ordinary citizens," he said.

RBS said it would be liable for the first 19.5bn in losses on the assets insured as part of the scheme, with the government shouldering the remainder.

Graph

In exchange for the government guarantee, RBS has committed to lending 25bn in 2009 - 9bn of mortgage lending and 16bn of business lending.

Lloyds Banking Group is also expected to take part in the scheme, which could see taxpayers guaranteeing up to 600bn worth of toxic debt.

RBS said the Treasury was also injecting a further 13bn into RBS, in exchange for shares, to further support lending. It said that another 6bn would be available should RBS need it.

BBC business editor Robert Peston says that RBS is being shored up in what some will see as Britain's biggest ever bailout.

He adds that the losses borne by taxpayers as a result of the new scheme could be substantial in a prolonged, severe recession.

However, investors welcomed news of the scheme, saying its terms were more favourable than initially thought.

RBS shares were up 17% at 27.1 pence, while Lloyds climbed 24% to 71p.

Shake-up

BIGGEST UK CORPORATE LOSSES
24.1bn RBS 2009
14.9bn Vodafone Group 2006
13.5bn Vodafone Group 2002
10.8bn Lloyds (HBOS) 2009
6.4bn Cable & Wireless 2003
Mr Hester also announced a "sweeping" shake-up of the group's business as it aims to cut costs by 2.5bn a year.

He said that the bank would be separated into two arms, with the bank's riskier assets and operations grouped together.

The bank's overseas business would be cut back, with its operations to be reduced or sold in 36 of the 54 countries it works in.

He said that job cuts would be substantial but gave few details, angering union representatives.

Reports had suggested job losses could total 20,000.

"We are extremely frustrated by the lack of clarity over the company's restructuring proposals with no firm detail on jobs," said Unite's joint general secretary, Derek Simpson.

"The uncertainty hanging over the heads of these workers is unacceptable."



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