British Banks Under Pressure to Estimate Costs of Libor-Rigging

Britain’s biggest banks are under pressure to tell investors how much they expect the Libor rigging-scandal will cost shareholders when they start to report first-half earnings this week.

Barclays Plc (BARC) was fined a record 290 million pounds ($450 million) last month for manipulating the benchmark London interbank offered rate. Civil lawsuits may cost the bank a further 626 million pounds, according to Morgan Stanley analyst Betsy Graseck. Royal Bank of Scotland Group Plc, Lloyds Banking Group Plc (LLOY) and HSBC Holdings Plc (HSBA) may pay as much as 2.2 billion pounds in fines and legal costs, Graseck said in a July 12 note.

Libor is the fourth scandal to hit the U.K. industry in the past 14 months that may erode earnings. The country’s biggest banks by assets have already set aside 6.9 billion pounds to compensate customers improperly sold insurance. They are also under investigation for mis-selling interest-rate swaps to small businesses. Separately, HSBC may be fined for failures in money- laundering controls that U.S. Senators say gave terrorists and drug cartels access to the country’s financial system.

“We hope for some form of guidance on what the banks are looking to provide for on Libor,” said Richard Hunter, head of equities at Hargreaves Lansdown Plc (HL/), a British stockbroker with 26 billion pounds of assets under management. “Where the U.S. is concerned, you have the potential for litigation which can take considerable time to get to the other side of.”

‘It’s Coming’

Barclays has tumbled 22 percent since the June 27 fine, erasing 3.4 billion pounds of market value. RBS slid 16 percent, HSBC 11 percent and Lloyds 8 percent in the period.

RBS, Lloyds, HSBC and Barclays are likely to resist calls to estimate the costs of litigation and fines because the cases are pending, according to four people with knowledge of the banks’ thinking who asked not to be identified. Banks only have to make a provision if the amount can be “estimated reliably,” according to the International Financial Reporting Standards used by U.K. firms. Officials at the banks declined to comment.

“They’ll say it’s a contingency, the amounts are unknown, therefore we can’t deal with anything with certainty,” said Prem Sikka, an accounting professor at the University of Essex, England. “I would say they should provision,” he said. “They know it’s coming.”

Regulators in the U.S. and Europe are probing more than a dozen banks worldwide over allegations they manipulated Libor, the benchmark interest rate for more than $500 trillion of securities. Investigators are examining whether traders colluded to rig the rate for profit and whether banks understated their borrowing costs to appear healthier than they were.

U.S. Decline

The Libor probe may overshadow an increase in profit before one-time items at Barclays, Lloyds and HSBC as provisions for bad loans ebb and costs decline. By contrast Wall Street’s five biggest banks, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., posted the lowest first-half revenue since 2008 in the first half of 2012 as trading and deal-making dried up.

RBS, Lloyds and HSBC may each be fined about 420 million pounds by regulators, Morgan Stanley’s Graseck said. RBS may have to pay a further 680 million pounds to settle civil lawsuits, HSBC 224 million pounds and Lloyds about 38 million pounds, according to Graseck.

Following the fine and criticism from U.K. regulators, Barclays Chief Executive Officer Robert Diamond, Chairman Marcus Agius and Chief Operating Officer Jerry Del Missier all stepped down. The London-based lender is slated to report earnings at 7 a.m. on July 27.

Investors will be focusing on how the search for a replacement for Diamond is progressing and for any details on whether his departure may trigger a separation of Barclays’s investment banking unit from its consumer operations, according to Morgan Stanley analyst Chris Manners.

‘Clear the Decks’

Still, “Barclays may take some sort of hit to clear the decks ahead of a new CEO coming in,” said Alan Beaney, who helps manage 200 million pounds, including Barclays shares, at RC Brown Investment Management Plc in Bristol, England.

The lender may say pretax profit increased to 4.1 billion pounds for the first half from 3.7 billion pounds in the year- earlier period, according to the median estimate of five analysts surveyed by Bloomberg. The estimates exclude the costs of the Libor settlement, debt-valuation adjustment, gains or losses on acquisitions and other one-time items.

A reduction in provisions for bad loans and cost cuts at the bank’s consumer unit will help to compensate for shrinking income from the securities unit, Gary Greenwood, an analyst at Shore Capital in Liverpool, wrote in a July 23 note to clients.

Lloyds Reports

Barclays’s investment banking unit’s net income before debt valuation adjustments may drop to 5.95 billion pounds from 6.37 billion pounds in the year-earlier period, Morgan Stanley’s Manners wrote in a note to clients on July 23.

Lloyds may say pretax profit climbed to 1.4 billion pounds from 1.1 billion pounds in the first half of 2011, according to five analysts surveyed by Bloomberg. The London-based lender is slated to report results at 7 a.m. on July 26.

Impairments for bad loans will fall by almost 2 billion pounds, estimated Ian Gordon, an analyst at Investec Plc (INVP) in London. Even so, net interest margin, the difference between what the lender earns on loans and its cost of funding, is being squeezed, Credit Suisse Group AG analysts led by London-based Carla Antunes da Silva wrote in a note to clients on July 23.

Net interest margin may fall to 1.93 percent by the end of the first half, from 2.07 percent at the end of June last year, Antunes da Silva said. Lloyds CEO Antonio Horta-Osorio said in May the margin will narrow to less than 2 percent in 2012.

Branch Sale

Lloyds agreed last week to sell 632 branches to Co- Operative Bank Plc for as much as 750 million pounds to comply with the terms of its 2008 government bailout. Lloyds may post a loss of as much as 1.15 billion pounds on the sale after agreeing to provide capital to Co-Op to complete the deal. Credit Suisses’s Antunes da Silva said she’s seeking details on how the sale will affect earnings.

Lloyds and its competitors may also have to increase the amount they have set aside to compensate clients who were mis- sold payment protection insurance. HSBC has already made a 770 million-pound provision, Barclays 1.3 billion pounds, RBS 1.2 billion pounds and Lloyds 3.6 billion pounds. Lloyds may have to set aside a further 300 million pounds as more customers seek redress, Manners said.

HSBC, which generates most of its earnings in Asia, may say profit rose to $12.95 billion for the first six months, up from $11.47 billion in the first half of 2011, according to five analysts. RBS, the recipient of the biggest banking bailout in the world, may say next week first-half pretax profit slipped to 1.85 billion pounds from 1.87 billion pounds in the year-earlier period, according to three analysts surveyed by Bloomberg. HSBC reports results on July 30 and Edinburgh-based RBS on Aug. 3.

‘Underwhelming Picture’

All lenders are facing a squeeze on profitability after the U.K. economy slid into its first double-dip recession since the 1970s in the first quarter. Lloyds, Barclays and RBS have all scrapped or delayed their profitability targets this year.

Lloyds’s Horta-Osorio said on Feb. 24 the lender won’t meet the target it set last year of boosting its return on equity to between 12.5 percent and 14.5 percent by the end of 2014. The bank had a 6.2 percent loss on equity for 2011. Diamond said on Feb. 10 that Barclays may fail to hit the 13 percent target for ROE by 2013 after it fell to what he called an “unacceptable” 6.6 percent in 2011. RBS lowered its medium-term ROE target to 12 percent from 15 percent on Feb. 23.

“With limited scope for negative surprise on impairments and with a predictable weak outlook for revenues, expect a broadly underwhelming picture,” Gordon said.

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

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

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