RBS sets aside $2.8b for misconduct, legal action
The Royal Bank of Scotland put aside some 2 billion pounds ($2.8 billion) as the taxpayerowned institution continues to tally the costs of misconduct and legal claims. In an unscheduled update released Wednesday, the bank also said it would inject 4.2 billion pounds into its pension funds because of accounting changes. CEO Ross McEwan said the bank was determined to put past issues behind it.
"We will now continue to move further and faster in 2016 to clean-up the bank and improve our core businesses," he said. "We've always been open about the scale of past issues facing RBS and although there is clearly much more to do, this announcement is a further step towards addressing legacy issues and building a great bank."
The cash was set aside for legal claims in the United States regarding toxic mortgagebacked bonds but doesn't include provision for separate conduct matters by the U.S Department of Justice and various U.S. State Attorneys General, though the bank acknowledged such costs "could individually or in aggregate prove to be substantial." More money was also set aside for compensation in the scandal surrounding consumers who were improperly sold payment protection insurance. The bank also wrote down nearly half a billion pounds in respect to private banking.
The bank was bailed out at the height of the 2008 financial crisis and has been dogged by its past excesses, including an ill-fated global expansion drive that briefly made it the world's largest bank. It remains 73-percent-owned by the British taxpayer. It is now a much different bank, despite the lingering clouds. Shore Capital Markets' banking analyst Gary Greenwood said the bank could readily deal with the hit.
"While such headlines are disappointing they are not necessarily unexpected and we note that RBS now has the balance sheet strength to comfortably absorb such costs," he wrote.
Meanhile, Royal Bank of Scotland Group Plc dropped after the bank took a surprise 3.6 billionpound ($5.2 billion) hit to the value of its assets and set aside more money for past misconduct, limiting Chief Executive Officer Ross McEwan's ability to return capital to shareholders.
Measures to plug a pension deficit will hurt the tangible net asset value by 1.6 billion pounds in the fourth quarter, RBS said in a statement on Wednesday, a month before its scheduled fullyear earnings. It also took a 1.5 billion-pound charge tied to a U.S. mortgage-backed securities lawsuit and 500 million pounds for wronglysold payment protection insurance, pushing it into a full-year loss for 2015.
McEwan, 58, is facing a pivotal year in his efforts to return capital to shareholders for the first time since the bank's 45.5 billion-pound taxpayer-funded bailout at the depth of the global financial crisis. His to-do list is dominated by a looming U.S. settlement, as he shrinks the investment bank by eliminating thousands of jobs to focus on U.K. consumer lending.
"It's a set-back, but hardly fatal," said Ian Gordon, an analyst at Investec Plc with a buy rating on the shares. "There is some incremental bad news here which will cap the scale of the 2017 buyback." The shares slumped as much as 5.7 percent, the biggest intraday decline since August, and traded at 252.50 pence at 11:45 a.m. in London, down 3.2 percent. RBS has decreased about 16 percent this year, while Lloyds Banking Group Plc, which was also bailed out during the financial crisis, has declined 13 percent.
RBS said it would alter the accounting policy for its pension program, which will reduce capital buffers. In addition, the bank said it would make a 4.2 billion-pound payment into its defined-benefit pension program in the first quarter to accelerate contributions that it would otherwise have made through 2023.