Government makes £1bn paper profit as market bets on healthy RBS figuresKatherine Griffiths, Banking Editor
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The Government made a £1 billion paper profit on its 70 per cent stake in Royal Bank of Scotland yesterday on growing optimism that the lender will follow Lloyds today in predicting that the worst is over for the economy.
But RBS, the UK’s biggest bank in balance-sheet terms, is likely to adopt a more cautious tone than Lloyds. It will probably say that it has broken even for the six months to June 30, with strong profits in its investment banking business wiped out by losses in the retail and corporate bank.
RBS’s shares surged 10 per cent, closing up 4.75p at 53.45p. The Government took a stake worth £20 billion in RBS in October to prevent its collapse. Last night, that holding was worth £21.2 billion.
As the last bank to publish figures in this week’s reporting season, all eyes will be on RBS to see how bad the books are. After Lloyds’ announcement that it had been hit by £13.4 billion in impairments on bad debts, RBS is expected to say it has taken a charge of about £7 billion. Investors hope the bank may say that it is near to the bottom on souring commercial property loans, credit cards and personal debt.
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However, if RBS does announce a break-even position or a loss that is below analysts’ expectations, it would reflect a move by Stephen Hester, RBS’s chief executive, to kitchen-sink the bank’s problems by taking aggressive writedowns on its assets.
Mr Hester will attempt to offer hope for the future, laying out a five-year plan to return RBS to profitability. If he makes good progress and RBS’s share price hits 70p next year, Mr Hester could collect about £10 million in cash and shares.
He will also announce the appointment of a new finance director, completing the overhaul of RBS’s management team since it almost collapsed last year. However, the RBS chief is likely to emphasise that there is much work to do. Ian Gordon, an analyst at Exane BNP Paribas, expects Mr Hester to say that it will be “a long, hard struggle” to restore the bank to health.
The bank has made modest progress with that goal, this week selling its retail and commercial operations in Taiwan, Hong Kong, Singapore, and Indonesia to Australia and New Zealand Banking Group for £325 million. It is close to offloading its business in India and China for about £200 million, probably to Standard Chartered.
RBS is also in negotiations with the Government over its asset protection scheme (APS), the insurance programme announced in February to take some of the strain of rising bad debts at RBS and Lloyds.
RBS is due to put £325 billion into the scheme while Lloyds has earmarked £260 billion for the APS. By allowing banks to offload problem assets, they can dramatically reduce their risk and increase their capital strength. However, Lloyds’ upbeat prediction that its impairments have peaked has prompted speculation that it may either try to reduce its use of the APS or abandon it altogether, instead raising money through a rights issue.
Analysts at Deutsche Bank said yesterday that the rally in Lloyds’ share price may prompt the bank to consider cheaper ways to improve its capital position. Lloyds must pay about £15 billion in fees to use the APS.
However, bankers said Lloyds would probably stick with the APS at least in part because of the huge bad debts sitting in the corporate lending book of HBOS, which it bought in September. Lloyds said on Wednesday that it had already burnt through £10 billion of the £25 billion “first loss” it must take under the APS before costs start to be incurred by the taxpayer.
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