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December 5, 2007

RBS sees £2.5bn wiped from its value

by Richard Kilner

Story link: RBS sees £2.5bn wiped from its value

The Royal Bank of Scotland saw its value tumble by almost £2.5bn yesterday. A leading broker undermined confidence with a negative note the effects of which have had an impact on the general stock market.

The bank’s long-awaited trading update is due out tomorrow, which is expected to include subprime-related writedowns of something between £1-2bn.

Banks have relied too heavily upon the credit markets (which are now subject to the credit crunch) for revenue and funding and this, combined with higher leverage the balance sheet risk, means that there will be an effect on the UK economy, according to Morgan Stanley Research Europe.

The RBS shares lost 5.3%, closing on 439.25p. The RBS is not the only bank to see falling share prices though. Barclays lost 4%, and Lloyds TSB finished down by 3.8%.

Over the last six months the credit crunch has had a significant impact, with the majority of stocks in the sector down by a third in that time. The FTSE, in which banking plays an important role, finished the day at 6,315.2, down by 71 points.

The most obvious event highlighting the potential dangers of the credit crunch is Northern Rock’s present difficulties. The FSA’s recent warning to banks to guard against future credit problems has served to reinforce the anxieties felt over the credit markets.

The FSA’s retail MD, Clive Briault, is responsible for overseeing Britain’s banks. Yesterday, whilst speaking at the Council of Mortgage Lenders’ annual conference, he stated that there was a real chance that economic conditions could deteriorate further into 2008.

He went on to outline what firms should do, including making contingency plans for worst case scenarios, and robustly testing their funding methods to make sure they can withstand possible future conditions.

Morgan Stanley believes that the property bubble is being pricked, and that both the US and UK economies are slowing down.

In 2008 anxieties regarding profits, capital and dividend will only grow, Morgan Stanley believes.

The exposure of HSBC and RBS to the US subprime crisis has also been spoken of by the broker.

 

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