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By Sudip Kar-Gupta and Steve Slater
August 5, 2011 5:21 AM EDT
Royal Bank of Scotland slid to a pretax loss of 678 million pounds ($1.1 billion) in the second quarter, bruised by writedowns on Greek government bonds and Irish customers struggling to repay loans.
Shares in the bank -- 83 percent owned by the British taxpayer after a credit crisis bailout -- plunged 21 percent in early trade, the FTSE 100's worst performer as the index itself was hammered by fears about U.S. and euro zone growth.
At that point RBS stock was at its lowest in more than 2 years, a long way shy of levels at which the government, keen to find new sources of income, could sell its stake at a profit.
"The banks are not going to make a profit in this sort of environment and their provisions are going to get worse. RBS has got a lot of problems," said Brown Shipley fund manager John Smith.
"The possibility that we are heading into another credit crunch is very high," added Smith, whose firm has a small number of RBS shares.
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RBS Chief Executive Stephen Hester said his own investment bankers had retreated to much more defensive positions in recent months: "These are markets to be careful, not to try and be a hero," he told reporters on Friday.
His bank slid into the red after posting a 1.17 billion pound profit a year ago, hit by impairments on bad loans of almost 2.3 billion pounds. That was up from 2 billion in the first quarter but a little better than 2.5 billion a year earlier.
The bank wrote off 733 million pounds to cover anticipated losses on its 1.45 billion pound Greek bond portfolio.
It also said the impairment charge at its Ulster Bank operations in Ireland, where consumers are grappling with a housing market collapse, was 1.25 billion pounds, just 49 million pounds better than in the first quarter.
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RBS stock was down 8.7 percent at 27.66 pence in mid-morning trade, having fallen as low as 24 pence earlier in the session.
That left it a long way short of the 49.9 pence level at which the British taxpayer effectively bought its stake and implies that Britain is currently sitting on a loss of around 20 billion pounds on its RBS investment.
"The big problem at the moment for investors is the wholesale funding market, and banks such as RBS could have problems," said Royal London Asset Management fund manager. Jane Coffey.
Earnings at RBS were also undermined by an 850 million pound provision to cover the costs of compensating customers who had been mis-sold payment protection insurance.
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