Royal Bank of Scotland (RBS) has revealed that losses on its portfolio of leveraged loans has increased almost fivefold to £1.25 billion in the space of six weeks.

At the annual results in February, RBS insisted that its portfolio of loans to finance geared buyouts was still of very high quality and wrote off only £285 million, or 4p per £1 of loans.

Yesterday it said that the write-downs had grown to an average of 12p per £1. It also revealed that its total exposure to buyouts was greater than the £8.7 billion of funded loans revealed in February.

Funded and unfunded loans – those funds agreed to but not yet paid out – stand at £12.3 billion.

RBS has been a significant backer of buyouts but was left warehousing loans to buyouts including Alliance Boots, Brake Brothers and BUPA Hospitals when the credit crunch effectively closed the syndication market last summer. RBS also revealed an additional £1.9 billion of write-offs on asset-backed securities; £1.8 billion on exposure to monoline insurers, which insure against credit default by bond issuers; and £1.4 billion in other write-downs.

The bank said it was confident that the writedowns fully reflected the deterioration in market conditions. Sir Fred Goodwin, the chief executive, said: “These marks look pretty stringent.”

Apart from the problems in the global wholesale bank, underlying performance remained “satisfactory”, RBS said.

The bank formally announced the whole or partial sale of its RBS insurance division, which includes Direct Line and Churchill.

After the writedowns, and allowing for asset disposals that would generate a net £4 billion in additional capital, RBS said that the planned rights issue would increase its Tier 1 capital ratio - a closely watched measure of balance sheet strength – to above 8 per cent by the end of the year.

The £12 billion rights issue has been fully underwritten by Merrill Lynch, Goldman Sachs and UBS. The cost of the underwriting would be up to 1.75 per cent of the money raised, or £210 million. All RBS directors plan to take up their rights in full. Sir Fred will pay £856,000 for his new shares. Sub-underwriters will receive 0.5 per cent of the fees.

Sub-underwriters have already been approached. New Star Asset Management, a leading investor in bank shares, has taken about £50 million of the sub-underwriting.

John Duffield, its founder, welcomed the rights issue, saying that it should be a turning point for the bank. He also welcomed the new non-executive directors, adding: “It would be nice if the board were a bit less chauvanistically Scottish.”

The ABN acquisition was approximately on track, RBS said, with cost savings coming in more quickly than expected and offsetting additional revenue targets, which had been missed.

Two thirds of the £5.9 billion in fresh write-downs were attributed to losses in RBS with the rest losses from assets inherited as a result of the joint acquisition of the Dutch bank ABN Amro last year.

Sir Tom admitted that RBS had, with hindsight, paid a high price for ABN and revealed that it had considered insisting on a price cut during negotiations as the credit crunch took hold. “As things were unfolding, we did consider whether we should try to renegotiate the price,” he said. “But that was not possible.”

He pointed out that many other organisations had been interested in buying ABN in full or part. “If we were less than 20-20 in our foresight, we were in good company.”

Sir Fred said that RBS had not been alone in failing to anticipate the freezing up of credit markets: “One in 10,000 events can happen.”

He also said that RBS had made the mistake of relying on credit-rating agencies and of underestimating the importance of liquidity. “There is no substitute for having a high level of capital,” Sir Fred said.

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