Royal Bank of Scotland reported a smaller-than-expected writedown of 206 million pounds ($334 million) on toxic assets in the third quarter but said it faces more this quarter and bad debts are rising sharply, sending its shares lower.
RBS, which is taking 20 billion pounds of emergency capital from the government, said it wants to be in a position to resume paying dividends in 2010, which would require it to buy back 5 billion pounds of government preference shares.
"We do regard those preference shares as unnecessary and expensive debt and we want to remove them as soon as it is prudent and practicable," said Stephen Hester, incoming chief executive.
"We are hopeful that we are able to remove the dividend block in time for fiscal 2010," he told reporters on a conference call.
RBS said a worsening economy, difficult financial markets and moves to reduce risk on its balance sheet would have an adverse effect on its fourth-quarter and full-year results and more writedowns are likely.
RBS wrote down 5.9 billion pounds on structured product assets in the first half, and analysts had forecast it could write off billions more.
Writedowns in the third quarter would have been higher, but accounting changes on how securities are classified provided a net boost of 1.2 billion pounds.
Exposure to counterparty and sovereign risk, which could include losses on exposure to Iceland or Lehman Brothers and other banks, reduced income by 1 billion pounds in October, RBS said.
By 0841 GMT RBS shares were down 6.8 percent at 60.7 pence, the biggest faller in the FTSE 100 share index.
RBS said its operating profit before writedowns in the first nine months of the year was down 8 percent on the year, reflecting rising bad debts in some of its businesses.
Debt quality deteriorated sharply in the third quarter; in UK retail and commercial banking, impairments were up 9 percent in the first nine months of the year, having been down 2 percent at the half-year stage, the bank said.
A strategic review is aimed at "achieving appropriate risk-adjusted returns, reduced reliance on wholesale funding and lower exposure to capital intensive businesses," it said.
The Edinburgh-based bank, hit hard by the credit crisis, raised 12 billion pounds from shareholders earlier in the year and could end up about 58 percent state-owned once the government cash injection is completed.
RBS said it could repurchase the government's preference shares by selling other preference shares or capital instruments to private investors once markets improve, or by using capital from elsewhere within the group.
The bank is in talks with "a small number of parties" regarding the sale or partial sale of its insurance business, and talks should conclude before 2008 results are released, said Guy Whittaker, finance director.