Bloomberg News

RBS Expects to Pay Fine to Settle Libor Investigations

November 02, 2012

RBS Has Third-Quarter Loss After $644 Million PPI Charge

Royal Bank of Scotland Britain’s biggest taxpayer-owned lender, swung into a third-quarter loss after setting aside 400 million pounds ($644 million) more to compensate clients wrongly sold loan insurance. Photographer: Chris Ratcliffe/Bloomberg

Royal Bank of Scotland Group Plc (RBS), Britain’s biggest taxpayer-owned lender, said it expects to pay a fine in the coming months to settle regulators’ probes into allegations the lender tried to manipulate Libor.

Whether or not the penalty exceeds the record 290 million pounds ($467 million) Barclays Plc paid in June, “it will still be a miserable day in RBS’s history,” Chief Executive Officer Stephen Hester told reporters on a call today as the bank posted third-quarter operating profit that beat analyst estimates. “I’d be disappointed if we were talking to you at our full-year results in February without having had more news.”

Libor is the biggest regulatory obstacle to overshadow Hester’s attempts to overhaul the company after it received the biggest banking bailout in history in 2008. RBS said today it would set aside a further 400 million pounds to compensate clients wrongly sold loan insurance and derivatives, bringing the total the bank has earmarked to 1.7 billion pounds.

RBS is one of more than a dozen banks worldwide facing regulatory probes into allegations that they manipulated the London interbank offered rate, the benchmark for more than $300 trillion of securities. The Edinburgh-based lender has fired at least four traders following an internal probe, and last month suspended its head of rates trading for Europe and the Asia- Pacific region, the first senior manager to be put on leave.

The shares fell 2.1 percent to 281.3 pence in London, little more than half the price the government paid when it provided RBS with a 45.5 billion-pound rescue during the financial crisis. The stock has climbed 39 percent this year.

Net Loss

The net loss for the quarter was 1.38 billion pounds compared with a 1.23 billion-pound profit in the year-earlier period. Analysts had predicted a loss of 276 million pounds, according to the median estimate of eight surveyed by Bloomberg.

That loss includes a 1.46 billion-pound accounting charge on the fair value of RBS’s debt. So-called credit valuation adjustments require banks to book losses when the value of their debt rises, and gains when it declines, on the theory that a loss, or profit, would be realized were the bank to repurchase that debt.

“Economic pressures are restraining customer activity levels and as a result banks are running hard to stand still in this environment,” Hester said today.

RBS has led a two-year investigation into its role in the Libor-rigging scandal. RBS traders and their managers regularly sought to influence the firm’s submissions to the benchmark interest rate between 2007 and 2010 to profit from derivatives bets, according to employees, regulators and lawyers interviewed by Bloomberg. Staff also communicated with counterparts at other firms to discuss where rates should be set.

Regulatory Dance

“There is a spectrum” of how advanced talks are with different regulators, Hester, 51, said today. “We have, in the end, to dance to the tune of the regulators.”

RBS today followed Lloyds Banking Group Plc is setting aside more money for payment-protection insurance claims after regulators ordered banks to compensate clients who were forced to buy, or didn’t know they had bought insurance to cover their repayments on mortgages, credit cards and other loans. Lloyds, Britain’s biggest mortgage lender, set aside 1 billion pounds more yesterday, which together with RBS’s provision brings the industry total to almost 11 billion pounds.

“At this point 400 million is our best estimate,” Finance Director Bruce Van Saun told reporters on the conference call today. “We’ve tried to step up and get in front of it, but I can’t say there won’t be further” provisions, he added.

Operating Profit

Operating profit, which excludes costs linked to payment- protection insurance and accounting charges tied to the fair value of RBS’s debt, rose to 1.05 billion pounds from 2 million pounds in the year-earlier period. That beat the 714 million- pound median estimate of 11 analysts surveyed by Bloomberg.

Impairments for souring loans fell by 23 percent to 1.18 billion pounds in the third quarter as losses from its Ulster Bank unit stabilized at 329 million pounds in the third quarter. Impairments at the U.K. consumer division fell 28 percent in the quarter to 141 million pounds, while they climbed 7 percent at the U.K. corporate unit.

Hester has cut assets by more than 800 billion pounds, eliminated 36,000 jobs and scaled back RBS’s securities and Irish units since 2008. RBS won’t try to keep the 316 branches Banco Santander SA (SAN) walked away from purchasing last month, Van Saun said on a call with reporters today. RBS has to sell the outlets by 2014 to comply with a European Union state-aid ruling after being bailed out by the U.K. taxpayer.

‘Clean Bank’

“You will start to see a very clean bank and the chance potentially to put a dividend back in place in 2014 and that will create further grounds for the government hopefully to have the option as to selling some stock,” Van Saun said in an interview with Bloomberg Television today.

RBS said in January it would cut about 3,500 jobs at the investment-banking division, run by John Hourican, and sell or close the unprofitable cash equities, mergers advisory and equity capital markets divisions. Revenue at the remaining markets unit rose to 1 billion pounds from 447 million pounds in the year-earlier period, boosted by a 162 percent jump in revenue from the fixed income and currencies business.

Hester said he has no plans to sell Citizens Financial Group Inc., the U.S. consumer and commercial lender RBS bought in 1988, because it’s a “core” part of the bank sand not in the best interests of shareholders.

“It’s unlikely that today is the best time to sell financial services assets,” Hester told journalists. “I’ve never ruled anything out, though.”

Pretax profit at the U.S. unit jumped 81 percent to 223 million pounds in the third quarter as revenue climbed and impairments tumbled 75 percent.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Howard Mustoe in London at hmustoe@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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