Royal Bank Of Scotland’s Big Loss

Monday, The Royal Bank of Scotland Group plc (RBS) announced in its fourth quarter trading update that it expects to post a full-year loss for 2008 of £7-8 billion pounds, before an extraordinary goodwill impairment charge of £15-20 billion.

In addition, there will be an impairment charge of £17-19 billion related to Fortis’s investment in ABN AMRO, entirely attributable to minority interests. We note that goodwill impairment charges have no impact on regulatory capital ratios.

On an operating basis before all nonrecurring items, RBS estimates underlying breakeven performance, as profitability in the retail and commercial banking business will offset losses Global Banking and Markets Division, hurt by difficult trading conditions, global economic slowing, asset write-downs, and exposure to Bernard Madoff Investment Securities LLC. This is in line with our estimate, which showed nominal profitability for the year on an operating basis.

Companywide, credit impairment charges will run in the £6.5-7.0 billion range, while credit market write-downs on credit risk exposures should be about £8 billion.

At the same time, RBS announced a restructuring in its capital agreement with the UK government, whereby £5 billion of preference shares held by the government will be replaced by ordinary shares at 31.75 pence per share if not purchased by other parties. This restructuring will improve the company’s balance sheet, increasing the Core Tier 1 ratio by roughly 100 basis points to an estimated 6.9-7.4%. The Tier 1 ratio is expected to be about 9.5-10.0%.

We are reviewing our estimates. RBS will report formal 2008 results on February 28.

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