Impairments surge; bank warns of little improvement before 2011
By Simon Kennedy, MarketWatch
LONDON (MarketWatch) -- Shares in Royal Bank of Scotland slumped over 12% Friday after the bank said its first-half net loss widened to 1.04 billion pounds ($1.74 billion) due to soaring bad-debt charges and also warned that results may not improve significantly until 2011.
The earnings statement came as RBS (UK:RBS 46.80, -6.63, -12.40%) (RBS 15.75, -2.54, -13.89%) also appointed a new chief financial officer, completing a total overhaul of the bank's senior management team after it was bailed out by the U.K. government.
The bank's loss widened from an 827-million-pound deficit a year earlier and was worse than expected, driven by a five-fold increase in total impairments charges to 7.52 billion pounds.
The loss would have been even bigger if it wasn't for a 3.8 billion pound gain from redemption of some of its debt.
Shares in the group dropped 12.2% in London. The stock, however, is still up around 4% for the week. The recent gains mean the shares had briefly traded above the 50.5 pence average price that the government paid for its roughly 70% stake.
CEO Stephen Hester, who replaced Fred Goodwin last year, said he believes taxpayers will get all their money back, but said there "will be no miracle cures."
"Our task is no less than one of the largest bank restructurings ever done, in the face of strong economic headwinds," Hester said.
"Overall results may not substantially improve until 2011, and full recovery will take time."
RBS Reports 1 Billion Pound Loss
The Royal Bank of Scotland on Friday reported a 1 billion pound loss on soaring charges for bad debt, and the market reacted with dismay to the bank's outlook. But CEO Stephen Hester says the British taxpayer, which is the majority owner, will in time be rewarded.
He was also much more cautious about the outlook for loan losses than Eric Daniels, the CEO of Lloyds Banking Group (UK:LLOY 98.61, -6.01, -5.74%) (LYG 6.68, -0.40, -5.65%) , who said Wednesday that Lloyds' impairments had likely peaked. See archived story.
Hester told analysts that if impairments follow the pattern of past recessions, they're likely to stay high for two or three years.
Analysts at Killik & Co. said Hester's comments could "remove some of the short-term froth" from share prices across the sector.
"The tone of the statement is definitely more candid than those released by others, maybe due in part to the fact that Stephen Hester is new to the role and is therefore able to communicate a more-realistic assessment of the outlook for the group," Killik said.
Targets set
The bank set out a string of targets to return it to financial viability, including lifting its Core Tier 1 capital ratio to more than 8% in 2013 and slashing its reliance on wholesale funding by more than half over the same timeframe.
It's also halfway through a plan to reduce its balance sheet by 500 billion pounds through the closure or sale of businesses that have been designated as non-core.
