Re: RBS set to report massive losses, talk of nationalisation
The Company's statement yesterday was not as clear as it might have been as careful attention needs to be paid to the loan loss provision nomenclature.
However, it seems that the toxic derivative provisions have increased moderately in proportionate terms (since the interims) and one hopes that that will be an end to it.
The other loan loss provisions are substantial but may be regarded as being just about covered by operating profits.
The goodwill has always been deducted from capital anyway. There is no affect on income generation capacity or declared capital. It is a pity that mention was made of the potential write-off because it has been aggregated with the real loss and has become a headline figure.
No details of HMG's insurance scheme have been published but, if rates are as severe as has been suggested in the media, HMG will deter the banks from using the scheme, thereby defeating its very object.
As Stephen Hester was not at the helm when the ghastly decision to buy ABN was made and the other lending and trading was done, the heavy provisioning for the year just ended cannot be a smear on his reputation. One would have thought that it would be in his personal interest to be quite robust at this stage with provisioning policy. That will not be the case for subsequent performance. Whilst he is necessarily cautious, even wary, of the performance in the months to come, one would hope that further provisioning can be covered by operating income leaving some profit.
Whilst there is lots of talk of nationalisation there is less explanation of what it might achieve. Northern Rock was special in that market and retail confidence in the bank was allowed to collapse in a spectacular manner. That is not the case with RBS. Only the stock market has collapsed. That will not interfere with its trading. There are no queues of depositors seeking repayment of deposits and there is no suggestion of the money market being blocked to it. It must have the highest capital ratio in its recent history. It has a man at the top with a clear mandate to secure a sustainable business and he has HMG backing.
If it can produce £10bn operating profit and, after provisioning, £5bn attributable profit then, assuming 50bn Ordinary Shares or thereabouts, that would be an EPS of 10p. Miserable in terms of its earnings history but it makes a mockery of the current share price.
But it all depends upon how bad the recession becomes.
Nevertheless, some resoration of confidence might take the price up to last week's close and shareholders might then be tempted to take up their rights. HMG's control level will then be unchanged and Mr Brown and AD would be able to point to the "green shoots of recovery" of the banking system. The media and the herd may then be impressed.
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