Royal Bank of Scotland faces some recession due to US subprime lending crisis

The shares of Royal Bank of Scotland Group PLC went up Thursday after the small writedown due to the U.S. subprime lending crisis.

Photo: Royal Bank of Scotland faces some recession due to US subprime lending crisis

RBS, Britain's second-largest bank, said it was booking a 1.25 billion pound (1.7 billion EUR; US$2.6 billion) writedown for its credit market exposure, including that of newly acquired ABN Amro Holding NV.

RBS said that 950 million pounds of the writedown related to RBS, with the remaining 300 million pounds (415 million EUR; US$613.7 million) at ABN Amro. The total subprime exposure at both institutions is 5.25 billion pounds (US$10.7 billion; 7.3 billion EUR)

Collins Stewart analyst Mark Potter said the market had been expecting a total writedown closer to 2 billion pounds (US$10.6 billion; 7.2 billion EUR).

"Management have given the market a massive amount of comfort this morning," Potter said.

Hargreaves Lansdown analyst Keith Bowman said that while "some lingering concerns will remain, with the full impact of the current credit crunch still not yet fully quantified, today's statement should greatly restore investor confidence."

The bank's share price closed up 2.7 percent at 478.5 pence (US$9.79; 6.56 EUR), reflecting both the better-than-expected writedown and the bank's upbeat profit forecast.

"We expect to be well ahead of market consensus at operating profit level," said RBS Chief Executive Fred Goodwin.

Consensus forecasts are for operating profit of 9.8 billion pounds (13.6 billion EUR; US$20 billion) in 2007, up from 9.4 billion pounds in 2006.

The RBS statement followed a similarly conservative writedown for losses on securities linked to the U.S. subprime mortgage market collapse by Barclays Group PLC, which unveiled a 1.3 billion pound (US$2.7 billion; 1.84 billion EUR) writedown based on a total of 18.4 billion pounds (US$37.7 billion; 25.8 billion EUR) of exposure.

Goodwin said that the RBS writedowns allow room for future mortgage delinquencies and deterioration of assets. Additional writedowns would occur only "in the event that things get dramatically worse," he said.

He said that there were signs that conditions in the leveraged finance market were "thawing slightly for good-quality transactions," but added that he did not expect the securitization market "to spring back quickly."

Goodwin added that the bank's 70.5 billion EUR(US$99 billion) purchase of ABN Amro was "off to a promising start, and we now anticipate better financial returns than we envisaged at the time of the bid."

"More importantly, the increased exposure to many high growth economies that ABN Amro brings us seems more attractive and relevant than ever," he added.