LONDON Royal Bank of Scotland (RBS.L) warned it will be hit by more writedowns and rising bad debts this quarter as its incoming chief executive kick-started a strategy overhaul aiming to restart dividends in 2010.
RBS, which is taking 20 billion pounds ($32.5 billion) of emergency capital from the government and investors, said it expects losses on bad loans to continue to rise as a worsening economy and tough financial markets feed through to consumers and businesses.
More writedowns are likely and a possible goodwill charge will hit fourth quarter earnings, but it wasn't possible to forecast second-half results, the bank said.
Investors were also unsettled by a 10 percent jump in assets in the third quarter, despite RBS's attempts shrink loans.
By 6:38 a.m. EST RBS shares were down 5.83 percent at 61.4 pence, the biggest faller in the FTSE 100 share index .FTSE.
"The near-term outlook is challenging," said Sandy Chen, analyst at Panmure Gordon. "Credit quality trends are poor, there has been a significant jump in risk-weighted assets, and a possible writedown of goodwill has been flagged."
The 281-year-old Edinburgh-based bank has been brought low by the credit crisis and the government could own about 58 percent of it if shareholders don't take up the offer of shares.
Stephen Hester, who takes over as chief executive later this month, said he will refocus the bank around stable, customer-focused businesses. RBS will continue to be global, but with reduced balance sheet and risk exposures, he said.
Hester wants to be in a position to resume paying dividends in 2010, which would require it to buy back 5 billion pounds of government preference shares.
"We are hopeful that we (will be) able to remove the dividend block in time for fiscal 2010," Hester told reporters on a conference call.
BAD DEBTS RISING
RBS wrote down 5.9 billion pounds on structured product assets in the first half, and analysts had forecast it may write off billions more.
It wrote down 206 million pounds in the third quarter, limited by accounting changes on how securities are classified that provided a net boost of 1.2 billion pounds.
Exposure to counterparty and sovereign risk, which could include losses on exposure to Iceland or Lehman Brothers and other banks, was 700 million pounds in September and hit income by 1 billion pounds in October.
Global banking and markets, the investment bank arm, will make a loss in the fourth quarter even before any writedowns, it said.
RBS said its operating profit before writedowns in the first nine months of the year was down 8 percent on the year, reflecting the rising bad debts in Britain, the United States and elsewhere.
Non-performing loans rose to 1.72 percent of loans by the end of September, from 1.47 percent three months earlier.
RBS's capital raising will lift its core tier 1 capital to about 7.9 percent, above the average for European banks, up from just 5.2 percent.
Running capital too thin cost Fred Goodwin his job as RBS chief executive last month, after his ill-timed takeover of parts of ABN AMRO last year added to strain on the balance sheet.
Hester said the bank could repurchase the government's preference shares by selling other preference shares or capital instruments to private investors once markets improve, or by using capital from elsewhere within the group.
RBS is in talks with "a small number of parties" regarding the sale or partial sale of its insurance business, and talks should conclude before 2008 results are released, said Guy Whittaker, finance director.
(Editing by Will Waterman, Hans Peters and Sharon Lindores)