Sir Fred Goodwin, chief executive of Royal Bank of Scotland (RBS), yesterday defended the company’s push into American sub-prime mortgage securitisation as he revealed £1.5 billion of write-offs from the credit crunch.

Sir Fred said that RBS understood perfectly what its American investment banking offshoot, RBS Greenwich Capital, had been doing in taking sub-prime mortgages on to its balance sheet before packaging them up and selling them on.

RBS wrote off £950 million because of US sub-prime difficulties, and its newly acquired Dutch bank, ABN Amro, wrote off an additional £300 million from the same problem asset class. Sir Fred said: “I never like making provisions, but we knew what Greenwich was doing and we’re in the risk-taking business and sometimes risks come along.”

Greenwich had made “a lot of money in this business” in the past, Sir Fred said, and he added: “Every time we lend money, somewhere along the way some of it we’re not going to get back. This is part and parcel of the business we’re in.”

Greenwich, a major player in mortgage securitisation, came unstuck last summer when the credit crunch struck and investor appetite for asset-backed products evaporated overnight. Suddenly it could not sell the debt.

In a trading statement, RBS, one of the last Western banks to say how it had fared since the credit crunch, also said it had written off £250 million on leveraged buyout loans that it had been unable to sell on.

However, the write-offs were smaller than the worst expectations and sharedealers marked RBS stock higher as Sir Fred said that the bank would still comfortably beat forecast profits for the full year of £9.9 billion. The shares soared by more than 10 per cent initially, but later gave up some of their gains to end the day 3 per cent higher at 478½p.

The joint acquisition of ABN Amro via a consortium was “off to a promising start”, Sir Fred said, and RBS now envisages higher synergies from the deal than at the time of its bid battle with Barclays to buy ABN.

Adding in losses from HSBC and Barclays, Britain’s three biggest banks have posted write-offs related to the credit crunch totalling £5.3 billion in the past few weeks. The losses have mostly been on US sub-prime mortgages – either loans directly to Americans with poor credit histories or securities backed by packages of such loans.

The write-offs were, in each case, softened by write-backs on the carrying value of the banks’ own debt. RBS said that this would reduce its own net write-off by £250 million.

Sir Fred said that the buyout debt market was “thawing” and that good-quality deals were being done. RBS is thought to be warehousing billions of pounds in debt from Alliance Boots, Brake Brothers, BUPA Hospitals, Clear Channel Communications and other buyouts.

Sir Fred played down the problem, saying that leveraged finance provided less than 2 per cent of RBS’s income this year. “It’s not like it’s the only string to our bow,” he said.

RBS’s chief executive also expressed confidence in his group’s originate-and-distribute business model, under which investment banks temporarily take on debt before packaging it up and selling it on. Almost all banks have moved to this more capital-efficient model, abandoning the old practice of holding loans to maturity.

However, many debt investors now feel bruised, feeling that they have been sold rubbish in some cases. Sir Fred said: “Investors were maybe buying things and placing too much reliance on the credit ratings than the understanding of the underlying investments.”

RBS said that its UK corporate banking had seen no deterioration in credit quality, while credit quality continued to improve in personal unsecured loans. Northern Rock’s crisis had boosted RBS’s British retail deposits.

Summer floods would hit RBS Insurance profits, while Citizens, the American bank, had suffered difficult market conditions, the group said.

The global banking and markets division was producing good underlying growth after excluding the problem areas of sub-prime loans and buyouts.

Mark Phin, analyst with Keefe Bruyette & Woods, said the writedowns were less than feared and the jury was still out on the ABN acquisition. Mr Phin said: “We view this trading statement as a comforting first step to rebuilding confidence in RBS.”

Times Recommends

• Minister in talks with Saudis to protect creditors
• Premier Inn hits back in £29-a-room row
• Bankers hit back at 'populist' bonus supertax