RBS set to admit massive losses on toxic investments

Lloyds reluctant to give state a majority holding

Royal Bank of Scotland is today expected to unveil a loss of up to £27bn for 2008, as it writes down risky assets and about £20bn of goodwill from its ill-fated acquisition of ABN Amro and other deals of recent years.

RBS is also set to swap for ordinary stock about £5bn of preference shares, which it issued to the Government after October's first sector bailout. This would take the state's holding in the bank to about 70 per cent.

Lloyds Banking Group meanwhile is also likely to update the market, on the first day that its shares have traded since Lloyds TSB completed its acquisition of HBOS last week.

RBS, under new management, is thought to be happy to swap its preference shares, which would free it from their onerous 12 per cent interest charge. But Lloyds was yesterday resisting exchanging its preference stock for shares that would take the Treasury's stake in the merged bank to above 50 per cent.

The announcements are set to coincide with the Government outlining the terms of its latest bank bailout, which to free up lending will include guarantees on new asset-backed securities and illiquid assets on balance sheets. Banks are said to be free to choose whether to accept the guarantees, which they can pay for with cash, shares or other financial instruments.

RBS's £20bn goodwill writedown, estimated by analysts, will not weaken its capital position but will be a purging of the bank's past mistakes, made as it pursued deals to turn itself into a global force. The move is an admission that it overpaid for past takeovers, including the top-of-the-market £11bn acquisition of ABN Amro in late 2007 and $10.5bn spent on Charter One in the US in 2004.

At the weekend, the Prime Minister, Gordon Brown, said banks that needed to "come clean" about their losses on toxic assets.

Barclays is unlikely to add to Friday's emergency trading update, issued after its shares lost a quarter of their value in the last hour of trading. The bank, which unlike RBS, Lloyds and HBOS rejected Government investment last year, believes Friday's prediction of more than £5.3bn of profit for 2008 has drawn a line under the issue of its capital position. But its shares will be closely watched when trading opens, amid continuing concerns about the state of the financial industry.

RBS will spell out its losses from debt-related financial instruments after Deutsche Bank, Bank ofAmerica and Merrill Lynch last week announced massive further writedowns. RBS is not due to unveil its 2008 results until 26 February, but companies are required to inform the market if their earnings are expected to differ widely from analysts' estimates. RBS, Lloyds and Barclays declined to comment last night.

Stephen Hester, RBS's new chief executive, has every incentive to take a harsh line with the valuations put on assets and acquisitions. He undertook a similar exercise at Abbey National in 2003, when as chief operating officer he was put in charge of offloading the bank's risky debt portfolio.