Sir Fred's numbed … but still in a job

WHAT does a bank chief have to do to lose his job? Yesterday Royal Bank of Scotland chief executive Sir Fred Goodwin unveiled a half yearly loss of £692 million – the largest loss suffered in its history.

It follows a £5.9 billion write-down against US subprime loans and related assets.

It follows the £71 billion RBS-led takeover of Dutch bank giant ABN Amro – at the wrong time and the wrong price.

It follows a dramatic slide in the bank's shares which collapsed by as much as 70 per cent this year compared with the level a year ago.

It follows a mammoth £12 billion rights issue – the biggest ever cash call on the shareholders of a UK company, sprung just two months after the market had been led to understand no capital raising was needed.

And it follows bumper pay and bonuses paid to the chief executive running into millions of pounds a year over this period.

So what is the magic alchemy that keeps Sir Fred in his job? And what has the chairman, Sir Tom McKillop, done to protect shareholder interests?

Asked yesterday on his reaction to unveiling the massive loss, Sir Fred said he had gone through "a range of emotions … I'm very disappointed. I'm numbed by it." He had talked earlier in the day of it being a "chastening experience".

As well he might munch a slice of this humble pie.

But there is, of course, another side to the drama at Gogarburn.

Yesterday's results were much better than feared. Bank analysts had been expecting losses ranging up to £1.7 billion. The actual result is less than half that.

Shares in Royal Bank closed 3.2 per cent up at 240.5p, continuing a rally that has lifted the shares 96p since the low of 144.2p hit on July 16.

Profits from UK retail and business banking are up, UK mortgage lending is up, personal lending is up and, strange but true, bad debt provisions against these actually fell 8 per cent in the first half. Its non-performing loans are growing at a lower rate than those at rival Barclays.

The fact is, the underlying business at RBS has held up remarkably well through the credit crunch – so far. And it is also squeezing £1.6 billion of integration benefits from the ABN Amro takeover, where savings are running at double the level estimated at this stage.

The strongest argument for keeping Sir Fred Goodwin in place is that he is a maestro at integration as the NatWest take-over showed – with big benefits and dividends for shareholders.

He has also, through the ABN acquisition, diversified the bank's business, both geographically and by activity. It is not just about making RBS "big and global". That he has certainly done. But by far the best antidote to future credit crunch disasters is diversification of earnings.

Of course, investors feel angry about the share performance. But almost all banks have suffered as the credit crunch spread into a global phenomenon. RBS has deleveraged, raised capital to improve its capital ratios and done everything to cauterise the subprime horrors.

And if a 3 per cent fall in underlying profits is the cause for a beheading, there is barely a chief executive in the FTSE 100 Index who would be safe today.

RBS is transformed from the bank he took command of a decade ago. Had he not grown the bank in the way he did, it would have fallen victim to a predator.

Institutional investors are reluctant to change the captain in the middle of a storm – and this is by far the worst storm in the financial sector in decades . The test is whether he is now steering the right course, and that looks to be the case. Its UK mortgage book is sounder than most – with an average loan to value of 66 per cent on new business and 49 per cent on the entire book. Other UK banks envy this.

Neither Sir Fred nor his chairman Sir Tom McKillop qualify for summary execution on these figures. They will be judged on their ability to handle the darkening storm ahead as the UK, the US and Europe goes into recession. If the first half was tough, wait till you see the second.

There is no quick-fix solution. Next year will also be a struggle . "The difficult conditions in financial markets", Sir Fred warned, "look set to be compounded by a deteriorating economic outlook, with consensus forecasts pointing to slowing growth in many countries." Note the absence of any statements about "turning the corner" and "over the worst".

"Chastened and determined" is the new mood. Few shareholders would wish it otherwise.

Bad news, good news and regrets

THE BAD NEWS

A £5.9 billion write-down against US subprime-related debt may not be the end of the problems, as US house prices continue to fall and defaults rise.

Basic earnings per share have slumped from 22.8p to a loss of 4.7p. Provision against exposure to monolines has been raised from £1.8 billion to £2.1 billion.

Charge for "impairments" (bad and doubtful debt provisions) has risen to £1.7bn (£871 million.).

Effective tax rate has risen from 24.9 to 43.8 per cent.

Second-half trading will be tougher as recession bites and arrears and defaults on business and personal loans rise sharply.

The expert analysts are forecasting: net profit before tax overall to fall from £7.1 billion to £3.9 billion.

THE GOOD NEWS

Group income overall down just 1 per cent at £16.8 billion and underlying profits only 3 per cent down at £5.1 billion.

Ahead of schedule in realising benefits from ABN Amro acquisition.

Capital position strengthened: Core Tier 1 ratio at 5.7 per cent and on course to top 6 per cent by year-end.

UK retail and business bank profits up 8 per cent.

UK mortgage lending up 9.4 per cent; personal lending up 7.2 per cent; credit card lending up 7 per cent; savings balances up 12 per cent.

UK mortgage portfolio has average loan to value ratio on new business of 66 per cent and LTV of 49 per cent. Impairments just 0.04 per cent of UK mortgage balances.

The search is on to find new non-executive directors to beef up the board.

SIR FRED GOODWIN'S STATEMENT:

"It has been a chastening experience and reporting a pre-tax loss of £691 million is something I and my colleagues regret very much.

"This loss is a consequence of previously signalled write-downs on credit market exposures amounting to £5.9 billion.

"In response to these new market conditions we moved decisively to strengthen our capital position materially.

"In so doing we are acutely aware that we drew heavily on our shareholders for financial support and we recognise that we must now deliver a level of performance that meets their expectations for the company and restores value to our shares.

"We are determined to do so, and this is our focus."

FACT BOX

THE RBS losses of £691 million represent only half-a-year's trading, but they nevertheless represent a significant point in the history of banking losses.

The biggest global banking loss was recorded by Société Générale of France which declared losses of about $7.2 billion (£3.7 billion) earlier this year after huge losses run up by a single rogue trader Jérôme Kerviel.

Barings Bank suffered from a similar problem in 1995 after the activities of trader Nick Leeson, based in the Far East, which led first to the loss of £827 million for the bank and then to the collapse of the bank itself.

The biggest annual loss by a British high street bank was the £715 million lost by Lloyds TSB in 1989 which came after huge losses in South American markets.

IN NUMBERS

£691 million
RBS pre-tax loss for the latest six months

£5.1 billion
The profits made by RBS during the same period last year

170,000
Total number of RBS employees worldwide

1727
Year Royal Bank of Scotland was founded

£6 billion
Amount written-off for bad debts in the past year

£4.2 million
Amount earned last year by Sir Fred Goodwin, RBS chief executive, including bonuses

15 million
Number of RBS British customers

50
Per cent drop in RBS share price over the past year

£48 billion
Amount paid by RBS for ABN Amro

£12 billion
Amount RBS had to raise in a share issue to boost finances

16,400
Number of RBS employees in Scotland

2,276
Number of UK RBS branches

6,800
Number of RBS free ATM machines in the UK

50
Number of countries where RBS operates