RBS May Post First Loss; Barclays Probably Fell Most in Decade

By Ben Livesey
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Aug. 6 (Bloomberg) -- Royal Bank of Scotland Group Plc probably will report the first loss in its 40 years as a publicly traded company and Barclays Plc may post its biggest profit drop in a decade because of credit writedowns and rising bad loans.

RBS, Britain's second-biggest bank, may report a first-half loss of 1.16 billion pounds ($2.3 billion) on Aug. 8, according to the average estimate of 10 analysts surveyed by Bloomberg. Barclays, the U.K.'s third-biggest bank, probably will say tomorrow that net income dropped 42 percent to 1.52 billion pounds in the six months ended June 30, analysts estimate.

RBS was battered by about 5.7 billion pounds of credit losses in the first half, about a third of which were tied to the acquisition of Amsterdam-based ABN Amro Holding NV's investment banking unit, analysts said. Edinburgh-based RBS and its partners Banco Santander SA of Spain and Fortis of Belgium outbid Barclays last year for ABN Amro, in what was the biggest banking acquisition in history.

``Barclays has successfully avoided, either by good luck or good judgment, the worst deals that have driven higher markdowns elsewhere,'' said Ian Gordon, a London-based analyst at Exane BNP Paribas, who has ``outperform'' ratings on Barclays and RBS.

RBS, led by Chief Executive Officer Fred Goodwin, and London-based Barclays relied on securities trading for about 33 percent of earnings last year. In the first half, RBS probably will post a 2 billion-pound loss at its investment banking unit, while the competing Barclays Capital unit may say pretax profit plunged 76 percent to 392 million pounds, according to the analysts' survey.

Fewer Writedowns

Barclays CEO John Varley, 52, probably avoided a loss as the company has reported fewer writedowns for securities linked to the collapse of the U.S. subprime mortgage market. Barclays and RBS may post additional losses on assets tied to bond insurers, according to analysts at Panmure Gordon & Co.

``Barclays may show resilient underlying numbers in investment banking, while RBS is different,'' said Neil Smith, a Dusseldorf-based analyst at WestLB AG, who has a ``hold'' rating on Barclays and recommends clients ``add'' to their RBS holdings. ``The key concerns will be about further writedowns and capital raising.''

RBS has dropped 40 percent this year, compared with Barclays's 25 percent decline.

First-half results at RBS were hurt by rising bad loans in the U.S. and U.K. The Citizens consumer banking unit, based in Providence, Rhode Island, said in April that loan-losses rose ``markedly'' in a mortgage-brokerage division. RBS, which had about 27 billion pounds of U.S. home loans at the end of last year, said in June that its credit quality was ``robust.''

Bad Loans

In the U.K., RBS has about 734 million pounds of bad loans, said Simon Pilkington, a London-based analyst at JPMorgan Cazenove Ltd., who has an ``underperform'' rating on the bank's shares.

Goodwin, 49, has tried to sell assets, including RBS's insurance arm. RBS raised 12.3 billion pounds in a share sale during June to replenish capital.

Barclays may post about 3.7 billion pounds of writedowns this year, according to analysts at Oriel Securities Ltd. in London.

The company said in May that it had 4 billion pounds of collateralized debt obligations backed primarily by residential mortgages, 4.2 billion pounds of U.S. subprime loans, 4.5 billion pounds of so-called Alt-A loans, and 12.6 billion pounds of commercial mortgages. Unlike RBS, Barclays hasn't marked down the value of its 7.3 billion pounds in buyout loans. The bank said in May that the loans were ``performing.''

Marked Down

Analysts at Citigroup Inc. have estimated Barclays may need another 9 billion pounds of capital.

Barclays raised 4.5 billion pounds in a share sale last month to shore up capital, hire bankers in the U.S. and open branches in Asia. Barclays has not added significantly to the 1.7 billion pounds of writedowns it took in the first quarter and will ``outperform'' rivals in terms of credit losses, President Robert Diamond, 57, said in June.

``Many regard Barclays's management as being in denial in terms of writedowns on toxic assets,'' said Gordon of Exane BNP Paribas. ``I think the market may be in for a positive surprise as they have been selling down assets and avoided the higher risk leveraged loan deals.''

Barclays may say first-half bad loans rose 87 percent to 1.8 billion pounds, according to analysts' estimates.

To contact the reporter on this story: Ben Livesey in London at blivesey@bloomberg.net