Edinburgh giant expected to be among worst hit as banks report half-year resultsBy John Phelps
PRESSURE for change at the top of Royal Bank of Scotland is set to intensify in the coming weeks amid reports that the Edinburgh giant plunged into losses of well over £1 billion in the opening half of this year.
Confirmation of the scale of the downturn is due on August 8 when chairman Sir Tom McKillop and chief executive Sir Fred Goodwin present their interim results. But with rumours rife that RBS is also struggling to sell its insurance business and the Australian arm of ABN Amro, the results are likely to round off a bank reporting season expected to be dismal when it gets under way this week.
This will include RBS's Edinburgh rival HBOS on Friday, where profits are set to halve following rumours it is being stalked by investment bank JP Morgan and also Spanish banking giant BBVA.
The RBS predictions come at the end of a miserable year for Goodwin and McKillop, who caused a storm when they became the first to tap banking shareholders for new funds after being criticised for an ill-timed purchase of ABN Amro ahead of the credit crunch.
Already, one major investor, Mark Burgess at Legal & General, has said the RBS knights have "a lot to answer for". It is believed he will be pressing for a timetable for at least one resignation.
While few analysts are prepared to forecast the actual half-year result, James Eden and the team at Exane BNP Paribas have stuck their necks out to predict an overall loss of around £1.25bn, after taking account of a £5.9bn writedown on US mortgages and further impairments of some £1.4bn.
Before these charges, they believe underlying profits may have slipped about 10% to around £4.9bn as financial transactions have dried up, although they will be looking for a further update on the bad debts outlook for the important American Citizen/Charter One banking operation and progress on the Australian and insurance operations.
While RBS's experience has been particularly painful, its rivals have also suffered. Overall profitability of the Big Five is expected to fall from £28.7bn to £15.1bn - a 47% decline.
The fall in profits and increased provisions for bad debts explain why the banking sector has been seeking fresh funds, in a rush started by RBS with its £12bn cash call and concluding with the poorly received HBOS £4bn rights issue.
Between them, the banks have raised about £20bn, although Capital Economics has said that the high street lenders may have to further scale back mortgage and loan offers to protect their balance sheets.
The RBS interims look set to wrap up a dismal interim reporting season for the Big Five. News of the biggest profits setback is expected from HBOS, which is due to report on Friday, amid speculation chief executive Andy Hornby could receive a continental takeover after the embarrassing flop of the rights issue.
The group has suffered from the twin effects of the slump in mortgage business at the Halifax and its lending to the property and housing sectors, which makes up about 38% of its corporate portfolio. The Exane BNP Paribas team believes profits may have halved to below £1.5bn in the opening half of this year.
Total writedowns and impairments are expected to be more than £2.3bn - up from just more than £1bn last time - and there are fears this could worsen in the second half as a result of the continuing fall in property values.
Lloyds TSB, which kicks off the reporting season on Thursday, is expected to show a jump in its own charge provisions from £890 million to around £1.5bn, and reported profits could drop by about 30% to just short of £1.4bn.
The group has held up relatively well so far because much of its funding comes cheaply through customer deposits. However, there are concerns it may have stored up trouble through its heavy sales of debt protection policies at a time of rising unemployment.
Lloyds earns only about 2% of its cash overseas and there has been speculation it could be planning a foreign acquisition to lessen its dependence on the UK economy.
Barclays Bank is expected to disclose a 28% drop in its own interim profits to just short of £3bn, with the shortfall reflecting an estimated £1.7bn of writedowns for its Barclaycard and credit market operations.
Analysts will be particularly keen for further news on the group's dividend policy at the August 7 results presentation, after directors promised to maintain the cash payment at 34p for the foreseeable future - at the current share price investors can pick up £9.70 in annual dividends for every £100 invested in the shares.
HSBC, with its spread of global activities, is likely to show it is not immune from the general pain, with news expected of a profits downturn from £14.2bn to around £10.5bn on August 4, according to the Exane BNP Paribas team.
The shortfall is entirely down to a switch from profits to losses at the group's US operations with other parts of the business expected to report higher figures.
The group should also enjoy some useful windfall gains from the recent sale of its Canary Wharf tower and the disposal of French regional banks.
