RBS Poised for Biggest Loss Since Crisis on Mortgages Provision

Jan 27, 2014 7:01 pm ET

Jan. 28 (Bloomberg) -- Royal Bank of Scotland Group Plc, Britain’s biggest government-owned lender, is on track for its largest pretax loss since 2008 after setting aside 3.1 billion pounds more ($5.1 billion) for legal and compensation claims.

The provision includes 1.9 billion pounds for lawsuits and fines tied mostly to the sale of $91 billion of mortgage-backed securities from 2005 to 2007, the lender said yesterday. It follows agreements Deutsche Bank AG, JPMorgan Chase & Co. and UBS AG struck with U.S. regulators to settle claims they didn’t provide adequate disclosure about mortgage-backed debt sold in the housing bubble that preceded the 2008 financial crisis.

RBS Chief Executive Officer Ross McEwan is attempting to overhaul the lender by eliminating assets and jobs. He said in November the bank would log a “substantial” full-year loss after 4.5 billion pounds of writedowns. His efforts are being hobbled by the cost of past regulatory missteps. More than five years after giving RBS the biggest bank bailout in history, the government still hasn’t been able to cut its 80 percent stake.

“This looks like a new CEO’s attempt to clear the decks and draw a line under the matter,” said Joseph Dickerson, an analyst at Jefferies International in London with a buy recommendation on the stock.

The stock fell 2.2 percent to 332.2 pence in London trading yesterday, below the 407-pence price at which the government says it would break even on its holding. RBS has fallen 9.2 percent in the past 12 months while Lloyds Banking Group Plc, the second-biggest government-owned lender, is up 50 percent. The Treasury sold a 3.2 billion-pound stake in Lloyds in September, its first step to returning the bank to full private ownership.

‘Just Emerging’

“When the crisis broke, the bank was involved in a number of different businesses in multiple countries that have subsequently faced heavy scrutiny by customers and regulators,” McEwan, 56, said in yesterday’s statement. “The scale of the bad decisions during that period means that some problems are still just emerging.”

RBS may now post a loss before tax and gains and losses on its own debt of about 6.8 billion pounds for 2013, said Gary Greenwood, an analyst at Shore Capital in Liverpool, England, who previously expected the loss would be about 3.3 billion pounds. It would be the biggest since 2008, when the lender posted a loss of about 8.3 billion pounds, he said. The company is slated to report full-year results on Feb. 27.

Eight top executives, including Chris Sullivan, head of the corporate unit, and Les Matheson, acting head of the consumer division, won’t now receive bonuses for 2013, Edinburgh-based RBS said. McEwan, who replaced Stephen Hester in October, had already waived his.

Bonus Talks

Even so, the lender is in talks with shareholders, among them the government, to get permission to pay employees bonuses of up to twice their base salary.

“The right position of the business is to be commercial,” Chairman Philip Hampton told reporters on a conference call. “The ability to pay competitively is fundamental to the prospects of the business.”

The provision includes 465 million pounds for customers sold insurance on loans they didn’t require, 500 million pounds for clients wrongly sold interest-rate hedging products, and a further 200 million pounds for legal expenses, the lender said.

That brings the total RBS has aside to compensate clients mis-sold payment-protection insurance to 3.1 billion pounds, putting it third among British banks after Lloyds and Barclays Plc. RBS said that rather than declining as expected in the final three months of the year, claims continued at the previous quarterly rate of about 225 million pounds.

Capital Forecast

The provision for mis-sold interest rate hedging products brings the total for RBS to 1.3 billion pounds.

The charges led the bank to cut its forecast for its core Tier 1 capital ratio, a measure of financial strength. RBS expects the ratio will be about 11 percent at the end of 2013, or as much as 8.5 percent under the latest rules set by the Basel Committee on Banking Supervision. That’s down from the company’s estimate of 11.6 percent and 9.1 percent in November.

“Fronting up to our past mistakes is very expensive, but RBS is a much stronger bank that can deal with these costs on its own while running a good capital position,” McEwan said on the call. “Dealing with these litigation and conduct issues is essential if we are to move the bank forward.”

JPMorgan said in November it had agreed to a $13 billion settlement over its sales of mortgage-backed securities. Frankfurt-based Deutsche Bank last month paid 1.4 billion euros ($1.9 billion) to settle claims that it didn’t provide adequate disclosure about mortgage-backed securities sold to Fannie Mae and Freddie Mac. Zurich-based UBS agreed to pay $885 million to the two mortgage financing companies in July.

--Editors: Edward Evans, Keith Campbell