RBS Loss Widened in 2012 on Swaps, PPI Redress Provisions

Royal Bank of Scotland Group Plc, Britain’s biggest taxpayer-owned lender, posted a wider full-year loss after it set aside an additional 1.1 billion pounds ($1.6 billion) to compensate clients wrongly sold insurance and interest-rate hedging products .

The net loss swelled to 5.97 billion pounds from 2 billion pounds in the year-earlier period, RBS said in a statement today. Analysts had predicted a loss of 5.1 billion pounds, according to the median estimate of nine surveyed by Bloomberg. RBS also said it will sell a stake in its Citizens unit in the U.S. and shrink its investment bank to boost capital.

The costs of redress for past missteps are hobbling Chief Executive Officer Stephen Hester’s attempts to revive profit at the lender, which received the biggest banking bailout in the world in 2008. The government is pressing the Edinburgh-based lender to sell more assets and bolster capital as it tries to recoup some of its 45.5 billion-pound investment in the lender.

2012 was a “chastening year” as the bank worked to “put right past mistakes,” Hester, 52, said in a statement. “We are determined to overcome the cultural and reputational baggage of pre-crisis times with the same focus we have applied to the financial cleanup from that era.”

Fourth-quarter operating profit tumbled 45 percent to 581 million pounds, while full-year revenue dropped 6.9 percent to 25.9 billion pounds in 2012. RBS said it expects growth in the U.K., its biggest market, to remain subdued.

Shares Drop

The shares fell 6.6 percent to 323.90 pence in London, their steepest decline in eight months. The stock has dropped 0.2 percent this year, making RBS the U.K.’s worst-performing bank stock. The government paid about 502 pence a share for its 81 percent stake.

“These results look pretty weak in terms of revenue, and the outlook for the business doesn’t look great either” said Shailesh Raikundlia, a London-based analyst at Espirito Santo Investment Bank who rates RBS a sell. “Their very low capital position is a big concern for us. All of these one-off hiccups they keep reporting are killing their capital.”

The firm’s core Tier 1 capital ratio, a measure of financial strength, rose to 10.3 percent at the end of December. Under the stricter Basel III rules, the measure stood at 7.7 percent, less than the 8.5 percent minimum those regulations will require. RBS will boost that ratio to closer to 9 percent this year, Chief Financial Officer Bruce Van Saun said.

Branch Sale

Bank of England Governor Mervyn King said in November U.K. banks may need to build up the capital they hold against potential losses and asked the Financial Services Authority to investigate and report back in March.

“We did reach an important accommodation in recent days with the government, our majority shareholder, and the regulators in relation to their well-publicized concerns across the industry on capital,” Hester said. “The two revisions to our strategy that go with that are a further shrinkage of our markets business, with the capital there coming down significantly further over the next couple of years” and the intention to start selling Citizens, Hester added.

RBS will sell a 25 percent stake in Citizens Financial Group Inc., the U.S. consumer and commercial lender it acquired in 1988, in two years. The lender also plans to sell the 316 branches regulators are forcing it to offload through an initial public offering, Hester said. RBS has approached the European Commission about extending the 2014 deadline for the sale.

Dividend Payment

Hester, who took over from Fred Goodwin in 2008, has cut assets by 907 billion pounds from their peak, eliminated more than 36,000 jobs and scaled back the securities unit following the bailout. The bank is trying to complete the “most important” parts of its restructuring in 2013, he said.

It will be up to the government to decide when to start selling its holding and when the bank can resume dividend payments, he added. The bank would “ideally” start paying dividends again at the earliest opportunity, he said.

The government hasn’t set a timetable for the disposal of its stake in RBS, Jean-Christophe Gray, Prime Minister David Cameron’s spokesman, told reporters today in London.

Efforts to reduce the government’s stake are being hampered by regulatory fines for manipulating Libor and provisions for customer redress.

Net Loss

The firm set aside an additional 650 million pounds to compensate clients wrongly sold interest-rate swaps to the 50 million-pound provision it made in August. It also earmarked 450 million pounds more to compensate clients who were forced to buy insurance they didn’t require to cover loans repayments, bringing the total cost of mis-selling payment-protection insurance to more than 2 billion pounds.

Britain’s biggest banks have already put aside more than 12 billion pounds for customers who were improperly sold PPI. Lloyds Banking Group Plc will set aside an extra 1 billion pounds for PPI and a further 200 million pounds for swaps when it reports full-year earnings tomorrow, Deutsche Bank AG analysts including Jason Napier wrote in a Feb. 20 note.

RBS’s net loss includes a 4.65 billion-pound accounting loss on the fair value of its own 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. Full-year operating profit rose to 3.46 billion pounds from 1.8 billion pounds.

‘Flat Income’

Operating profit at the investment bank rose to 1.5 billion pounds in 2012 from 900 million pounds. The unit posted an operating profit of 139 million pounds in the fourth quarter compared with a loss of 109 million pounds in the year-earlier period. RBS said it plans to reduce assets allocated to the unit by about 20 billion pounds, without providing further details.

“We have forecast flat income over the coming years which may prove optimistic” given the reduction on risk-weighted assets at the securities unit, Claire Kane, an analyst at RBC Capital Market said in a note to clients today.

Hester has faced calls to shrink the securities unit after RBS was forced to pay regulators a $612 million fine this month for rigging benchmark interest rates such as Libor. Investment banking chief John Hourican said he would step down following the settlement, which showed that traders had routinely rigged Libor to boost the profitability of their derivatives positions.

RBS will recoup about 302 million pounds from bankers by cutting its bonus pool and clawing back compensation to meet the 381 million-pound cost of settling the Libor rigging-scandal. The lender said it will reduce the amount it allocates for investment bankers’ bonuses for 2012 to 215 million pounds from about 360 million pounds for 2011.

“The banking industry has made quite a few missteps,” Hester said on a conference call with reporters today. “We’re hopeful that the biggest and most wrenching of past misconduct can be largely recognized by the end of the year.”

(Updates shares in sixth paragraph.)
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