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Royal Bank's resilience

• Robert Peston
• 6 Dec 07, 08:57 AM

Record profits and projections of incremental gains from a massive takeover. That鈥檚 the message from this morning. So what happened to the credit crunch and the global banking crisis?

Well, the storm raging through money markets affects banks in different ways 鈥� and if you are a large, diversified international group like RBS, not all of the impact is deleterious.

RBS has been a beneficiary of the withdrawal of cash by depositors from institutions, like Northern Rock, perceived to be vulnerable.

Worried savers鈥� money has to go somewhere. And both individuals and companies appear to have identified RBS as a safe haven.

says that it has 鈥渆xperienced strong deposit growth鈥�. And I understand that more than 拢800m of additional liquidity has gushed into its accounts over the past few months.

At a time when the rates charged by banks for lending to each other is hitting record levels, this inflow of deposits represents cheap money.

So unlike 鈥� which recently warned of a squeeze in net profit margins 鈥� RBS鈥檚 profit margins are improving. Which may, to an extent, offset the expected slowdown in the US and UK economies next year.

RBS has another advantage over banks with a predominantly UK focus. It鈥檚 been able to tap the generous liquidity provided by the and the .

The bank has therefore been less vulnerable to the perceived structural shortage of liquid funds in the sterling money market 鈥� for which the Bank of England鈥檚 conservative approach to the provision of cash to the banking system has been widely blamed.

But let鈥檚 not get carried away here.

RBS has been bashed by the debacle in structured finance and in the US sub-prime market.

In the second half of 2007, it has incurred write-downs of 拢950m on its holdings of assorted securities created from loans to US homebuyers with dodgy credit histories.

At the bit of the Dutch bank which it has bought, there are anticipated write-downs of 拢300m.

And there鈥檚 a further 拢250m impairment charge on RBS鈥檚 holdings of loans made to private-equity buyouts.

Not nice, but a long way from lethal.

Only a few years ago 鈥� before a takeover spree 鈥� damage on that scale would have killed RBS. Today it means that RBS鈥檚 pre-tax profits for 2007 will be a fraction under 拢10.5bn, a new record.

However that鈥檚 no grounds for complacency.

The coming year will be tough for all banks.

And RBS has residual holdings of collateralised debt obligations linked to sub-prime with a book value in excess of 拢5bn.

They are not worthless. But with the US housing market crumbling, further impairment charges may be unavoidable.

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