RBS loses $34 billion, agrees deal to insure assets

Sweeping restructure planned; will raise further capital to pay for insurance

Last update: 4:43 a.m. EST Feb. 26, 2009

LONDON (MarketWatch) -- The Royal Bank of Scotland said Thursday that the U.K. government has agreed to insure 325 billion pounds ($462 billion) of its assets as the bank unveiled a 24.1 billion pound net loss for 2008 -- the biggest ever by a British company.

The bank also announced sweeping restructuring plans and said it could issue as much as 25.5 billion pounds of additional preference shares to pay for the insurance and strengthen its capital.

The 2008 loss follows a net profit of 7.3 billion pounds for 2007, but is still significantly less than the 28 billion pounds that RBS (UK:RBS: news , chart , profile ) (RBS 6.59, -0.24, -3.5%) warned it could lose in January. See archived story.

It was also smaller than the 25.6 billion pound consensus loss forecast.

RBS said it will pay the government 6.5 billion pounds in the form of preference shares for the asset insurance scheme. It will separately raise an additional 13 billion pounds of capital from the U.K. Treasury in preference shares and has an option to top that figure up by a further 6 billion pounds.

The bank will be responsible for the first 19.5 billion pounds of losses on the 325 billion pounds of assets and the government will then cover 90% of any further losses, it said. The deal will allow RBS to increase its lending to homeowners and businesses by around 25 billion pounds.

Davy Stockbrokers analyst Stephen Lyons said that at first glance the terms of the asset guarantee scheme appear to be better than expected. He noted the 6.5 billion pound fee is 2% of the total assets, while markets had been expecting a fee of around 3%.

Shares in RBS surged around 30% in London as investors welcomed the terms of the deal and the smaller-than-expected loss. The stock is down more than 95% from a high in early 2007 and lost around two-thirds of its value in a single day earlier this year when it announced its expected loss.

Lloyds Banking Group (UK:LLOY: news , chart , profile ) (LYG 3.26, 0.00, 0.0%) , which is set to announce its participation in the guaranty scheme alongside its results on Friday, rose around 24% and Barclays (UK:BARC: news , chart , profile ) (BCS 5.93, -0.28, -4.5%) , which may also participate, rose 10.8%.

As part of its restructuring plans, RBS will shift 240 billion pounds of assets into a new non-core division, where they will then be sold off or run down over the next three to five years.

It's also planning to slash 2.5 billion pounds from the group's annual cost base and restructure its global banking and markets unit, reducing the amount of capital employed at thee division by nearly half.

There was no mention of likely job cuts, though on a conference call with journalists, CEO Stephen Hester didn't rule out reports that the bank would cut around 20,000 of its 177,000 staff.

RBS, which will soon be 70% owned by the government, has suffered from its acquisition of the investment banking business of ABN Amro, which sharply increased its risk exposures just as the credit crisis was beginning to emerge.

On a pro forma basis, the bank said it took a write-down on goodwill and other intangibles of 16.2 billion pounds as it slashed the value of the ABN Amro assets that it had acquired.

CEO Stephen Hester said it would be "hazardous" to make any detailed forecast for 2009. But he added that underlying income will come under further pressure as low interest rates squeeze savings margins and credit costs rise.

Hester replaced former chief executive Fred Goodwin in October when the bank said it would raise 20 billion pounds from the U.K. government.

Chancellor of the Exchequer Alistair Darling said Thursday that the Treasury has been in contact with Goodwin over possibly returning some of his pension pot, which will pay Goodwin around 650,000 pounds a year for life, according to press reports.

Darling also said the move to limit banks' losses from toxic assets will provide certainty that they keep lending.