STEPHEN HESTER, chief executive of Royal Bank of Scotland, yesterday resisted all attempts to persuade him to blame his predecessor for the bank’s travails.
But yesterday’s trading statement told its own story about Sir Fred Goodwin’s stewardship.
The problems, which will be detailed when RBS reports expected losses of £28 billion for 2008 next month, have been caused by two main factors.
First, RBS is writing down goodwill impairments on past acquisitions. And second, its past expansion into investment banking and structured credit portfolios of toxic assets has caused further writedowns.
The goodwill writedown is a legacy of RBS’s seven-year acquisition spree embarked on by Sir Fred, who was dubbed a “deal junkie” by analysts for his aggressive takeover strategy. This included buying part of Dutch bank ABN Amro at the height of the bull market in 2007 as well as a number of other deals such as buying Charter One bank in the US in 2004. From 2003 onwards, RBS expanded quickly and relied on funding from the wholesale markets to support new lending and assets on its balance sheet. These all but dried up after the collapse of US investment bank Lehman Brothers last year.
Indeed, buying ABN’s investment banking business increased exposure to the toxic structured credit products that have caused heavy losses.
The goodwill on the acquisitions will be written down by £15 billion-£20 billion, although this will not hit the bank’s capital reserves.
Mr Hester, who joined RBS in November, said yesterday: “RBS leveraged itself too much in the good times – the ABN acquisition was an element in that. . . . RBS was too leveraged at the wrong moment.
“The position RBS finds itself in is a parallel to the position the world finds itself in.” he added. “After many years of expansion it has been over-optimistic and borrowed too much money – that is true of economies, consumers and true of RBS.”
British prime minister Gordon Brown was less forgiving. “Almost all their losses are in subprime mortgages in America and related to the acquisition of ABN Amro. These are irresponsible risks taken by the bank with people’s money in the UK,” he said, adding that the decision to buy ABN “was wrong”.
As well as the goodwill writedowns, RBS will report a 2008 loss of £7 billion-£8 billion as profits are offset by credit market writedowns and other items. The structured credit products linked to US subprime mortgages on RBS’s balance sheet have fallen in value since the credit crunch, triggering some of the impairment losses which will reach £6.5 billion-£7 billion.
RBS’s investment banking unit has made estimated impairment losses of £3 billion due to a fall in the value of some of these assets and lower income. This includes a £1bn provision relating to petrochemicals group LyondellBasell.
There is a further £1.5 billion provision relating to losses from companies in a wide range of sectors such as housebuilding, chemicals and commercial property.
At RBS's retail and commercial bank, credit impairment losses are likely to be £3.5 billion from more consumer and company defaults. – ( Financial Timesservice)
