By Steve Slater
LONDON (Reuters) - Royal Bank of Scotland
RBS raised its writedown due to the impact of the U.S. subprime housing crisis and credit crunch to 1.6 billion pounds ($3.2 billion), excluding ABN. It had previously flagged a hit of 1.2 billion pounds through to the end of November, excluding a 250 million pound gain on the carrying value of debt it held.
The higher charge is mainly due to a 456 million pound markdown on its exposure to U.S. bond insurers, which have hit trouble and may leave some insurance hedges ineffective. Chief Executive Fred Goodwin said RBS could face more markdowns on its bond insurance exposure, which stands at 2.5 billion pounds.
RBS also marked down the fair value of ABN's wholesale businesses by 978 million pounds due to its exposures to problem assets.
Gains on asset disposals last year, including Southern Water, largely offset the impact of the writedowns.
The bank raised its expected benefits from its purchase of ABN businesses to 2.3 billion euros ($3.5 billion) from 1.7 billion, due to higher cost and revenue benefits.
RBS reported a 2007 underlying operating profit of 10.3 billion pounds, up from 9.4 billion in 2006 and the same as the average forecast by a Reuters Estimates poll of analysts.
By 0615 EST its shares were down 1 percent at 406 pence, after an early rise to 427.5p fizzled out.
"At first glance the overall results look mixed. The synergies expected from the integration of ABN AMRO have been raised, but write-offs due to market dislocation have increased, with further write-offs possible in 2008," said Neil Smith, analyst at WestLB, in a note.
"This may not be enough to enable the shares to outperform in the short term."
CAPITAL ASSURANCE
RBS said its tier 1 capital ratio ended last year at 7.3 percent and its core tier 1 ratio was 4.5 percent, better than analysts had predicted. Improved financial returns after the ABN deal "will help to accelerate delivery of the group's capital regeneration commitments," it said.
RBS shares have lost a third since the end of June as fears of big writedowns, compounded by worries it had bought ABN's wholesale bank just as capital markets slowed, raised concerns that its capital position was tight.
Goodwin said he may sell assets this year to help the bank's capital position, but that it will not be a forced seller.
"On asset sales, there probably will be odds and ends, but there are no plans to sell anything other than at a decent price," he told reporters on a conference call.
The bank transferred its global clients' activities in Brazil to Spain's Santander
RBS said difficult credit markets had significantly hit origination volumes for its Global Banking and Markets -- though other areas of the investment bank arm had performed well -- and warned it could take time for the turmoil to work through:
"We're not going to go back to where things were. We'll find a new equilibrium in due course. It doesn't feel like it's going to happen next week or next month, but there are tentative signs that we're moving in the right direction," Goodwin said.
Profits at the bank's UK retail arm rose 10 percent, its UK corporate banking profits rose 11 percent and wealth management reported a 30 percent rise.
But Citizens, RBS's U.S. retail bank, remains in a difficult environment and higher bad debts helped push down profits by 16 percent in sterling, or 9 percent in dollar terms.
(Additional reporting by Clara Ferreira-Marques and Golnar Motevalli; Editing by Catherine Evans)