Finance

Duncan Mavin is a former Bloomberg Gadfly columnist.

Royal Bank of Scotland is being walloped by another round of unexpected charges. But while they look bad, they're unlikely to derail the bailed-out bank's plan to resume paying dividends. They may even be a sign RBS's executives are actually getting to the end of the bank's long line of troubles.

Scottish Slide
RBS's shares have tumbled over the past year
Source: Bloomberg data

The latest set of charges take a 3.6 billion-pound ($5.2 billion) bite out of tangible net assets. The shares fell more than 3 percent on Wednesday, and at one point sank to their lowest since September 2012. CFO Ewen Stevenson warned there will be "more bumps in the road this year."

Charge Breakdown
Impact on RBS's tangible net asset value
Source: company filing

There are four elements to the latest round of charges:

The bank is adding 500 million pounds to its provisions for the mis-selling of payment-protection insurance. This isn't a huge surprise and essentially represents an update following a consultation with the U.K. regulator earlier this year. Santander, RBS's rival in the U.K., also upped its PPI provisions in the fourth quarter, and others will surely follow.

Writing down goodwill on the private banking unit by 500 million pounds looks bad -- but crucially won't have an impact on tangible net assets (hence it's excluded from the chart above).

RBS is also taking a further 1.5 billion-pound provision for litigation tied to U.S. residential mortgage-backed securities, bringing its total provision for RMBS to 3.8 billion pounds.

Again, this isn't a surprise. The size of the bank's bill for RMBS claims matter most -- RBS can't start returning capital to shareholders until it has greater clarity on the final cost. The picture got a little bit less hazy earlier this month after Goldman Sachs announced its own settlement and so RBS was able to refine its provision.

Management notes that its provisions so far only cover civil litigation and not a separate U.S. Justice Department investigation into RMBS which will likely result in higher charges. Bernstein analysts estimate that could result in an additional 1.4 billion-pound charge.

Finally, the one surprise in Wednesday's list is a 1.6 billion hit from changes to the bank's pension accounting policy, which has forced the bank to plug a hole in the company pension plan.

The move reflects new accounting rules and deficiencies in the legacy pension program, which dates back to the nineteenth century. Executives warned it's not necessarily possible to see if other U.K. banks will have to follow because their different pension plans have varying funding requirements.

It's a litany of problems. Stevenson called it "humbling." But what does it amount to?

Overall, the bank's Tier 1 capital ratio will likely be cut by 1.6 percent -- a hefty chunk, but RBS can take it. The lender expects to report a CET1 capital ratio of 15 percent at the end of December 2015. Investec analyst Ian Gordon estimates reckons that will rise to 16.4 percent by the end of 2016.

Safety Margin
Forecast CET1 ratios for 2016
Source: Investec, Bloomberg Intelligence

That's more than the average 14.07 percent consensus estimate for Europe's banks, according to Bloomberg Intelligence. It's a healthy buffer even after the latest raft of charges.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Duncan Mavin in London at dmavin@bloomberg.net

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