RBS Cautious on Outlook, but Confident on Insurance Sale

By | June 12, 2008

Royal Bank of Scotland’s performance and write downs on risky assets remain in line with its previous guidance, but its results will be held back by the impact of the global credit crunch, it said on Wednesday.

RBS said it was confident of selling its insurance arm for the price it had in mind at the start of an auction, despite speculation that tough markets have dampened interest.

But Britain’s second-biggest bank, which raised £12 billion ($23.5 billion) in the biggest ever rights issue earlier this week, said it was adopting a cautious stance towards risk in the light of jittery markets, hurting its share price. The bank’s focus on rebuilding capital is also likely to restrain profits, analysts said.

By 0950 GMT RBS shares were down 2.6 percent at 227.5 pence (app.$4.50) to be one of the weakest European bank stocks.

Other European banks were lifted by a media report that Russian billionaire Suleiman Kerimov has been buying shares in major Western banks.

“Everything seems to be as they said it would be, but the outlook statement is very cautious,” said Mamoun Tazi, analyst at MF Global. “Their appetite for risk has been tempered by the outlook on the economy and the markets, so if you try to interpret that, RBS could slam on the brakes and that could have negative implications on earnings growth,” he said.

RBS Chief Executive Fred Goodwin said the bank is cautious on prospects, but it “remains very much open for business. There’s still more bad news than good news, but we’re not looking at the end of the world,” he told reporters.

A UK housing market downturn is likely to take at least a year to work through, but there were “chinks of light” coming through in capital market areas that have slowed, he said.

The bank, which expects its first-half underlying performance to be “satisfactory”, said cost savings and revenue benefits from last year’s purchase of large parts of Dutch group ABN AMRO were running slightly ahead of target.

RBS is seeking to top up its rights issue proceeds with asset sales boosting capital by 4 billion pounds this year. An auction of RBS Insurance, which includes Direct Line and Churchill brands, had been valued at near £7 billion ($13.9 billion) but may not fetch that much, analysts have said. Four suitors including Zurich Financial Services have put in informal bids, people familiar with the matter have said.

“There are a number of people who would all ostensibly be good owners and capable of paying the price that we’re looking for,” Goodwin said. “We had a price in our minds that we were looking for at the start of the process and that hasn’t changed. We’re determined not to sell this for an undervalue, but at this point that doesn’t look like an option that’s going to come to pass,” he told reporters on a conference call.

The bank expects its core tier 1 capital ratio to be over five percent at the end of this month, and above six percent by the end of the year, helped by asset sales.

Banks across the world have written down billions of dollars of risky assets following a lockdown in credit markets last summer and have also been scrambling to raise cash and sell assets to repair their balance sheets.

RBS said in April it expected a hit of £5.9 billion ($11.7 billion) before tax from its credit market exposures this year.

RBS’ rights issue was aimed at rebuilding one of the most stretched balance sheets among European banks, following its purchase of ABN assets.

Its shares have tumbled over 40 percent this year, steeper than a 26 percent drop by the DJ Stoxx European bank index and cutting its market value under £38 billion ($75.2 billion).

(Additional reporting by Mark Potter; Editing by Elizabeth Fullerton/Elaine Hardcastle)

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