Royal Bank of Scotland has warned its deficit this year could hit £28 billion as the bank receives more help from the government.

The bank warned losses from writedowns, largely linked to the group’s takeover of ABN Amro in 2007, are expected to cost £20 billion, while losses excluding writedowns are expected to total between £7 and £8 billion.

RBS is due to release results for 2008 at the end of February and if the results meet expectations, they will represent the biggest loss in corporate history.

Stephen Hester, RBS group chief executive, said: “The dislocation of credit markets and the global economic downturn continue to hit RBS hard, as with many other banks. We are making progress in recognising excess risk and dealing with it.”

However, the bank has agreed a deal with the government to convert the expensive preference shares into ordinary shares, freeing up more money for lending.

The government bought £5 billion of preference shares in RBS as part of its bailout plan but the shares paid a 12 per cent dividend regardless of performance, and had to be paid ahead of dividends on ordinary shares.

RBS shareholders will be eligible to buy the £5 billion of new ordinary shares, with the Treasury buying up any remaining shares.

Given the last share offer was taken up by very few shareholders, the taxpayer could end up owning 70 per cent of the bank.

Over the next 12 months, RBS will increase lending by £6 billion as a result, the Treasury said.

In return, RBS has promised to lend to large corporations at 2007 levels, in addition to its pledge to continue lending to small firms and individuals.

Bank shares have fallen sharply recently amid concerns the sector will require further government help over the next few months.