Royal Bank of Scotland posts $1.7 billion loss

LONDON — The Royal Bank of Scotland posted a wider first-half net loss Friday, as bad debts jumped to 7.5 billion pounds ($12.6 billion) and sluggish activity in its retail and corporate businesses wiped out strong gains in investment banking.

Shares in RBS, in which the taxpayer holds a 70 percent stake after a government bailout last year, plummeted 13.7 percent as Chief Executive Stephen Hester warned that overall results may not substantially improve until 2011 and full recovery “will take time.”

The bank, Britain’s biggest in balance sheet terms, also announced that it had appointed U.S. banker Bruce Van Saun as its new finance director, completing a management overhaul begun after the government bailout in October.

RBS reported a net loss of 1.04 billion pounds ($1.7 billion) in the first half, compared with a loss of 827 million pounds a year ago.

Revenue rose 58 percent to 21.84 billion pounds, from 13.84 billion pounds a year ago.

Chief Executive Stephen Hester said that first-half results were “poor,” but added that analysed alongside the bank’s new strategy “they highlight well our core business potential, the hard work of our people in difficult times and the vulnerabilites and economic headwinds we grapple with.”

Partially offsetting the increase in the writedown on bad debts was a 3.8 billion pound profit from buying back the bank’s own debt when the banking crisis made it cheap.

That gave the bank a statutory pretax profit of 15 billion pounds, bringing it back into the black.

But the market focused on the negatives, with the share price down 6.7 pence at 46.75 pence in early morning trade. The stock had soared 10 percent on Thursday in anticipation of a more benign earnings report.

“It is difficult to draw many positives from these numbers, which even RBS management have conceded are poor,” said Hargreaves Lansdown analyst Richard Hunter. “The drop in the share price is reflective of collective disappointment as the bank’s view on impairments going forward seemed at odds with that of rival Lloyds.”

Unlike Lloyds, which released its first-half earnings earlier this week, RBS did not confirm that the period would be the peak for write-offs, with Hester declining to make such a call in uncertain economic times.

“It’s to be avoided to read too much into still relatively short amounts of economic data,” he told reporters on a conference call.

RBS earned the dubious honor of posting the largest annual loss in British corporate history last year — a 24.1 billion pound ($34.4 billion) black hole fed by the bank’s aggressive acquisition spree of recent years, including a distrastrous takeover of ABN Amro.

The very public downfall of RBS, a household name in Britain where it is heavily involved in the retail banking market, was a lightning rod for much of the public disgust at mismanagement of major financial institutions by well-paid senior bankers.

After the bailout, a new management team was put in place and unveiled a sweeping restructuring and announced plans to dump hundreds of billions of pounds of toxic assets into a government insurance program.

One of the first decisions of Hester’s board was to split the bank’s operations into two divisions — core and noncore — to separate out its bad businesses.

The core division, which contains businesses the bank intends to retain, made a 6.3 billion pound operating profit in the first half. The noncore division, comprising assets it plans to wind down over the next three to five years, posted an operating loss of 9.6 billion pounds.

Hester added that RBS had shrunk in size by around 26 percent, or 574 billion pounds, so far this year to put the bank on a firmer footing.

While he was confident of returning the bank to standalone strength, Hester remained cautious about the outlook, forecasting weaker investment banking earnings in the second half after the strong above trend rise in the first half.

“While we are positive about the end result, the journey will be an arduous one,” he said. “This will be a marathon, not a sprint.”

Hester was keen to stress the bank’s new focus on transparency, evidenced by the unusually lengthy earnings report — compared to its peers — that it presented to the London Stock Exchange on Friday.

Even after the October bailout, the bank continued to court controversy when anger erupted over a 16 million pound pension pot bestowed on its disgraced former chief executive Fred Goodwin, who led the overly aggressive expansion drive of recent years.

Hester told reporters that the package for Van Saun, who was a vice chairman and chief financial officer at Bank of New York Mellon until last July, was in line with other banking groups.