RBS announces biggest loss in UK corporate history
THE Royal Bank of Scotland (RBS)announced £25bn in losses today – the biggest in UK corporate history – as the Government unveiled yet another lifeline to the struggling sector.
And on the day that the tax payer’s stake in RBS look set to rise to 70% as a result of the measures, Lloyds TSB confirmed its controversial acquisition of HBOS.
RBS announced £7bn in losses in 2008 due to bad debts and that it was writing off goodwill of between £15bn and £20bn on its fated acquisition of parts of Dutch rival ABN AMRO in 2007.
The bank, once the UK’s second largest, was also left short of capital following hefty write-offs against debt-backed securities.
However, a weekend of emergency talks between bankers and the Treasury means that RBS and other troubled financial institutions can now insure against steep losses and guarantee their debt in a bid to halt the credit crunch.
In October, £37bn was pumped into the banking sector but to no avail.
The measures, which are aimed at getting the banks lending again, will see the Government extend the timescale for its Credit Guarantee Scheme extended to the end of the year.
This entails extending the Bank of England’s Special Liquidity Scheme, which allows banks to swap hard-to-trade assets for more liquid ones.
The latest bail-out package also includes an insurance scheme against banks losing more money from “toxic debt”.
Under the insurance scheme, banks will agree with the government the amount they expect to lose from particular debt.
The Treasury will then sell insurance against about 90% of the institutions’ additional losses from the debt.
It will also buy up to £50bn of safer assets from banks, which will include mortgage debt.
The Government will now swap up to £5bn pounds of preference shares in RBS for ordinary shares thereby increasing its stake in the bank.
It already owns 58% of RBS following the acquisition of £15bn of ordinary shares last November.
The move will stop RBS having to pay the 12% fixed dividend that preference shares attract – worth £600m per year – and will allow it to increase lending.
Reports suggest that the Treasury is considering a similar move with the newly merged Lloyds TSB/HBOS.
According to the superbank, which currently boasts 145,000 staff and 3,000 branches, the merger will deliver a total pre-tax annual cost savings greater than £1.5bn by the end of 2011.
It said that it was pleased with the strong response received to its offer to bond holders to exchange their upper tier securities for new tier capital instruments.
“Securities with a nominal value of in excess of £5bn have been tendered and the group expects to accept offers in respect of approximately £2bn of these securities,” it added.
The merger sees the taxpayer owning around 43.4% of the new Lloyds Banking Group.
The Financial Services Authority (FSA) had estimated that HBOS would have to raise £12bn if the takeover did not go ahead.
