LONDON (Reuters) –

A 5.9 billion pound ($11.4 billion)

writedown on risky assets sent Royal Bank of Scotland (RBS.L)

to a first-half loss of 691 million pounds — better than

feared, but still one of the biggest losses in British history.

RBS, Britain’s second-biggest bank, said on Friday the loss

was “a chastening experience” but it was building a comfortable

capital cushion and sales of assets were going as planned,

although tough financial and economic conditions would

continue.

Fred Goodwin, RBS chief executive, said the bank was

talking to “a number” of potential buyers for its insurance

arm, which is valued at 5 to 6 billion pounds, but he was not

reliant on a sale to reach higher capital targets.

By 5 a.m. EDT RBS shares were up 2 percent at 238 pence,

one of the top performing UK stocks, as analysts said its

capital ratio came in higher than expected and underlying

earnings were resilient in the face of faltering economies.

“It may have drawn a line under the big credit losses, the

capital raising is done and there are synergies to come through

from ABN … but the underlying business is reflecting a tough

market, particularly in the United States,” said Mike Trippitt,

analyst at Oriel Securities.

RBS swung to its first-ever reported loss from a 5.1

billion pound profit a year ago after being hit by the

writedowns on credit products. This was in line with previous

guidance but partially offset by an 812 million pound reduction

in the value of debt it carries.

It had been expected to report a 1.2 billion pound loss,

based on the average of five analysts’ forecasts.

Goodwin said difficult conditions in financial markets were

likely to be compounded by a deteriorating economic outlook.

“There are headwinds and they’re not abating at this point,

but we see business out there to be done with caution,” he

said.

Bad debts on mortgages and other loans jumped 58 percent in

the six months to 1.5 billion pounds, mainly due to charges in

its Global Banking and Markets (GBM) investment bank arm and

U.S. retail and commercial banking.

HARD HIT

RBS has had a troubled year and in June it was forced to

raise 12 billion pounds in the biggest-ever rights issue, to

repair a balance sheet stretched by last year’s purchase of

parts of ABN AMRO and the writedowns.

Asked if he was the right person to lead the bank after

some calls for him and his chairman to step down, Goodwin said:

“I’m very focused on what we’re doing here. We’re focused on

doing what’s right … to steer the business through a

difficult time.”

RBS, which has written down more than 8 billion pounds, has

been one of the banks hardest hit by the credit crunch, but it

is not alone.

A year in, banks have lost over $400 billion of assets

tarnished by the U.S. subprime housing crisis, forcing them to

raise billions from their own shareholders and outside

investors.

RBS said its core tier 1 capital ratio was 5.7 percent at

the end of June and will be above 6 percent by the end of the

year, even if it does not sell its insurance arm.

“Insurance is for sale, we would like to conclude a sale

and we believe our disposal process is on track,” Goodwin said.

“But if we don’t get the value we are looking for we are

not going to sell and we are fairly confident of meeting our

capital targets.”

RBS said its underlying profit fell 3 percent to 5.1

billion pounds and underlying income edged down 1 percent.

The riskier backdrop is allowing banks to push through

higher charges, however, and RBS’s net interest margin improved

to 2.09 percent in the first half from 1.96 percent.

The bank said it had taken “decisive action” to deleverage

as it cuts risk, especially in GBM.

(Editing by David Cowell and Quentin Webb)