Nov. 4 (Bloomberg) -- Royal Bank of Scotland Group Plc, waiting to take up the U.K.'s biggest bank bailout, abandoned its full-year profit forecast as credit-market losses worsened and bad loans rose.

RBS fell as much as 9.5 percent in London trading today after the Edinburgh-based company said it wrote down 1 billion pounds in October against assets tied to Lehman Brothers Holdings Inc. and Icelandic banks. It also took 1.4 billion pounds ($2.2 billion) of markdowns in the third quarter before reclaiming 1.2 billion pounds under new accounting rules, the bank said in a statement.

Chief Executive Officer Stephen Hester said the latest charges, coming on top of 5.9 billion pounds in the first half, show the bank has too much risk and may have a full-year loss. The ``global financial crisis'' has triggered rising loans defaults in the U.K., U.S. and Asia, the bank said. The government will own as much as 60 percent of RBS unless investors buy some of the 20 billion pounds of stock it plans to sell later this year.

``It doesn't look good in the fourth quarter, and we would expect that as we go into next year, impairments will rise,'' said Julian Chillingworth, chief investment officer at Rathbone Brothers Plc, who helps manage $21 billion including RBS stock. ``Like a large oil tanker, it is difficult to turn around.''

RBS may post a loss of 228 million pounds for the full year, according to the average estimate of seven analysts surveyed by Bloomberg. That compares with net income of 7.3 billion pounds last year.

Hester, who replaces Fred Goodwin as CEO later this month, said he expects the global economy to deteriorate and didn't dispute analysts' forecasts for a 2008 loss. Goodwin said Aug. 8 the bank would report a full-year profit.

Failing Hester's Test

Hester, 47, has instructed all the bank's units to provide him with business plans and said he will complete a review by the end of the 2009. He will update investors by February about which units he may try to sell.

RBS will keep businesses with ``customer franchises that have the ability to give good risk-adjusted returns,'' he said. ``There will be some businesses that don't meet these tests.''

Loans in danger of defaulting rose across all divisions in the first nine months, RBS said. They represented 1.7 percent of total loans as of Sept. 30, up from 1.5 percent at June 30. Impairments in retail and commercial loans in the U.S. rose ``sharply'' in the third quarter, and defaults also rose in the U.K. and Asia, the bank said.

RBS was down 7.2 percent at 60.5 pence as of 9:10 a.m. in London trading. That's below RBS's offering price of 65.5 pence for 15 billion pounds of ordinary shares in a sale later this year. Investors have no incentive to buy shares in the U.K.'s biggest rights offering unless RBS stock rises.

Preferred Shares

The company also plans to sell 5 billion pounds of preferred shares that pay the government 12 percent interest. The U.K. rescue package, which also covers Lloyds TSB Group Plc and HBOS Plc, restricts dividend payments and executive compensation until the preferred shares are repaid.

Barclays Plc, the U.K.'s second largest bank, is trying to stay clear of Prime Minister Gordon Brown's plan to pump 37 billion pounds of new capital into the country's banks to jumpstart lending. The London-based bank agreed to sell almost 7 billion pounds of securities paying as much as 14 percent interest to investors including funds in Qatar and Abu Dhabi to meet the U.K.'s new capital requirements, it said Oct. 31.

RBS follows Frankfurt-based Deutsche Bank AG and London-based Lloyds TSB Group Plc in using new accounting rules to limit writedowns in the last half of the year. The London-based International Accounting Standards Board decided Oct. 13 to allow European banks to avoid marking certain securities and loans to market from July 1.

`Unexpected Profit'

Deutsche Bank, which reported an unexpected third-quarter profit of 435 million, said doesn't need new capital. Lloyds TSB, which agreed to acquire Edinburgh-based HBOS, is seeking to raise 17 billion pounds for the combined banks.

RBS said its Tier 1 capital, a measure of its ability to absorb losses, would have been almost 12 percent as Sept. 30 had the capital-raising been completed.

To contact the reporter on this story: Ben Livesey in London blivesey@bloomberg.net

Last Updated: November 4, 2008 04:55 EST