Thursday, February 26, 2009


RBS (CEO Stephen Hester) reports today an annual loss for 2008 of £8.13bn before goodwill write-offs of £16.6bn (giving a £24bn loss from a gross statutory loss of $40bn), and restructuring of about a third of the bank's £2.2 trillion balance sheet (my calculation), by placing roughly 10% in a non-core division, another 10% in the UK Government 'bad bank' Asset Protection Scheme (announced today) plus another 10% likely to be swapped at the Bank of England liquidity window in 2009. Part of the cost/benefit of this is Government buying a further £6bn of B-shares (at the option of nationalised, UKFI-owned, RBS). Government funding and related measures will be very profitable for taxpayers (a promise in the RBS annual report). See also:
These shares will attract dividends but only have voting rights in certain circumstances? This matches the fee RBS would pay of £6.5bn plus other coupon and haircut. The fee is funded through the issue of B-shares, to cover the “first loss” of up to £19.5bn as part of the government’s asset guarantee scheme. As part of the scheme RBS agreed to waive some UK tax allowances, which is obviously another form of fee bartering, although if I recall there was already some 20 year dispensation for spreading tax liabilities into the distant long grass. The AP Scheme was agreed in the early hours of this morning, the corridors of power echoing to the midnight taps in HMT of laptops, maybe the Credit-Suisse boys at it again, keying their risk-accounting spreadsheets, calculating RBS's agreement to put £325bn of its assets into the scheme. Further losses after a first loss of 6% retained by RBS would be split between the Treasury, taking 90%, and RBS taking the remaining 10%. This is a super-SIV deal. It requires shareholder approval, not hard with UK Gov holding 68%, soon to be 75% (the government’s voting stake will be capped at 75%), and with the Government's economic interest “significantly” above that. Hester said participation in the scheme would help assist the bank to reduce risk for shareholders (mainly the Government at present) and provide for increased lending to UK customers. Its annual report for 2008 says it will centre its focus on the UK, which might raise some eyebrows in the USA? The share issue would be further dilutive to ordinary shareholders who won't get any dividend not even in shares in 2009, but Mr Hester insisted it represented capital on terms that would not be available from private markets and would count towards the group’s core capital. RBS Core capital will then be among the world's highest. Referring to spossible stress-testing results, Hester said, ”In all scenarios this is cheap insurance and the right thing for us to do... But that is quite different from saying it is a shareholder bonanza – it is not.”
Lloyds Banking Group – 43% state-owned – confirmed today it is in talks with the Treasury to participate in the scheme, “These discussions are ongoing and no terms have been agreed.” It is not certain that Lloyds’ participation would be on the same terms as those announced by RBS, but for fear of accusations of self-serving bias, equitable terms should be expected.
RBS promised to increase lending to UK homeowners and businesses by £25bn over the year, of which £9bn would be in new net mortgage lending, plus a further £25bn the following year. The Government loans would be made on “arm’s-length” pricing and credit criteria. Details of the fresh capital raising came as RBS reported pre-tax losses for 2008 on a statutory basis were £40.7bn giving a net loss of £24.1bn, biggest in UK corporate history. Goodwill write-offs were £16.2bn, due in large part (probably almost all of its £10bn share of the ABN AMRO purchase price). In the annual report the bank says it will 'centre' its core business on the UK, which may be an eybrow raiser for the Americans where RBS-owned Citizens Bank is in the top 10, possibly no.6 and where there is also a duty of responsibility not to behave proc-cyclically. Over there, after all, there is the Citizen's Bank Baseball Park. Shares in RBS were 17.75% up at just over half of one first class postage stamp, 27.2p in afternoon London trading, having earlier risen as much as 22% first thing. Alex Potter, banking analyst at Collins Stewart, reported by the FT, said the bank is in effect conducting a £19.5bn rights issue, but at a price (50p) well above the stock market level, through the issue of shares to the government, while the APS is larger and cheaper than had been expected. The bank’s asset quality trends, he says, are “appalling” and the recession is beginning to hit earnings. I beg to differ here in that the default retaes reported are well below those of the Bank of England's latest reports. But it does look worrying that RBS appears to planning withdrawel from, little or no growth in, property development and project finance? Potter predicted RBS would only break even this year, after further impairment charges, and there was “little chance of a dividend before 2012”, which is absurdly self-confident forecasting about a bank with over £2 trillions in assets (in ratio equal almost to all of UK GDP)!
Speaking of the possibility of future losses on insured assets, Hester said: ”All of us have our eyes open but we can’t foresee the future. I don’t think any of us have any ability to ascribe a sensible probability of where the loss will occur, or at what pace.” The bank's results coincide with a growing political row of useful news-displacement noise about the £16m pension pot awarded to Sir Fred Goodwin, the former chief executive of RBS. This agreed with RBS’s board and approved by the government, gives Sir Fred the Shred £650,000 a year with immediate effect. The figure – double previously reports – undermines claims that executives of failed banks will not be rewarded.
Under the RBS strategic review led by Mr Hester, RBS plans to shrink its global banking and markets division GBMD that expanded under Sir Fred’s leadership, by taking out 45% of the capital employed there i.e. over £900bn in derivatives that Mr hester told the Treasury Committee was only £400bn hedged, a remark that raised eyebrows through the roof. It seemed highly imporbable that the bank could have £500bn in one-way bets or net exposure especially in view of its stated RWA (risk-weighted assets) figures?
The FT reports that the bank aims to cut £2.5bn from its cost base and centre its business on the UK, and pledged to “drive major changes to management , processes and culture.” Mr Hester said the move could involve 20,000 job cuts but no definitive figure had been set. The strategic plan would take three to five years to execute, he added. ”We are not building on sand here,we are building on rock. What we need to do is sweep away the sand that is covering that rock.” Sir Philip Hampton, the new chairman, said the bank had been through “an exceptionally difficult period... confident that we can, must and will restore RBS to standalone financial strength.” The bank also announced the appointment of Nathan Bostock, chief financial officer of Abbey National, part of Santander bank, to be head of restructuring and risk. Gordon Pell, head of RBS’ regional markets division, is to be deputy chief executive.

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