Massive writedowns expose failure of RBS' ABN Amro takeover

Ahead of its 2008 results announcement next month, Royal Bank of Scotland has warned of £28 billion in writedowns and losses, much of it associated with the 2007 takeover of parts of the Dutch bank ABN Amro. The UK government has again stepped in to help boost the bank's capital levels.

The UK government took a 57.5% stake in the bank in a £20 billion bailout in November 2008 - £5 billion was spent on newly issued 12% preference shares. The bank has now exchanged these for ordinary shares, raising the government's holding to 70% and improving its core Tier 1 capital ratio to between 6.9% and 7.4%. That is an improvement on the 6% to 6.5% range reported at the end of 2008 - but remains significantly down on the September 30 Tier 1 capital ratio of 7.9%.

Chief executive Stephen Hester commented: "It's very appropriate that the market is concentrating on core Tier 1 - preference shares are just a disguised form of leverage."

RBS blamed the drop in its capital partly on the fall of sterling in the last three months of 2008, which it said led to a £45 billion increase in its risk-weighted assets to £588 billion. But the bank's capital was also hit by heavy losses associated with the continuing credit crisis and its acquisition of part of ABN Amro. The Global Banking and Markets division will report a loss for the quarter, including £2.8 billion in writedowns on its asset portfolio, an estimated £400 million exposure to alleged fraudster Bernard Madoff, and a new reserve of £600 million against its exposure to credit derivatives product companies.

Overall, the bank expects £7-8 billion losses for 2008, with another £15-20 billion of goodwill writedowns. Fourth-quarter writedowns of £1.9 billion on its credit exposures will include £1.1 billion writedowns on the bank's holdings of US collateralised debt obligations of asset-backed securities and a £1.5 billion increase in reserves against its monoline exposure.

Many of the losses can be linked to ABN Amro. "The vast majority of the ABN goodwill has now been written off... the Global Banking and Markets losses are roughly half and half between ABN and RBS," said Hester.

He added the bank would raise its lending to UK borrowers by £6 billion in 2009, in return for the capital restructuring. The UK government announced another package of aid for the financial sector this morning, including compelling banks to maintain lending in return for receiving government support.

In response to the news, RBS shares fell 68% by 3pm London time today, to 10.8p - valuing the company at £4.4 billion.

The bank also named a successor to its current chairman, Tom McKillop, who will retire in April. Philip Hampton will serve as deputy chairman from today and will succeed McKillop on his retirement. He was previously chairman of UK Financial Investments, the holding company set up in November 2008 to manage the UK government's holdings in RBS, HBOS-Lloyds TSB, Northern Rock and Bradford & Bingley.

See also: UK government creates £50 billion ABS fund
Government takes majority stake in RBS
RBS announces further credit market hit
RBS, HBOS and Lloyds TSB ask for government capital
RBS and HBOS bosses quit