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January 27, 2014 7:45 pm
Announcing Royal Bank of Scotland’s third-quarter results three months ago, Ross McEwan told investors that over time they would “see a much simpler bank”.
As the bank’s new chief executive unveiled more than £3bn of fresh provisions for past scandals on Monday evening, it became clear that shareholders would have to endure more pain before that promise was delivered.
Analysts said it appeared that Mr McEwan – like many new bank chief executives – was attempting to draw a line under the bank’s woes.
“Most of these elements were expected over the next three years – but this is an acceleration,” said Ian Gordon at Investec Securities. “It is an attempt to clear the decks ahead of results.”
It comes as banks around the world have been building ever increasing war chests of funds to deal with an avalanche of litigation that is hitting the sector.
JPMorgan Chase, the US bank, has set aside $23bn as it deals with legal troubles, for example. Meanwhile, RBS’s state-backed rival Lloyds Banking Group has made a provision of more than £8bn for mis-sold loan insurance alone.
For RBS, the latest costs make for grim reading. Not only is there a new £1.9bn provision for settlements relating to US mortgage-backed securities. But the bank also topped up its provisions for two persistent mis-selling problems – payment protection insurance and interest rate swaps. The new charges, of £465m and £500m respectively, take the overall cost of these two issues to £4.35bn for RBS.
Citigroup said it had not expected any further charges for either PPI or interest rate swaps.
RBS’s latest provisions follow a multitude of other charges the bank has faced in the past year.
Joining a conference call with Ross McEwan, chief executive of Royal Bank of Scotland, is like getting stuck in a lift with Eeyore, the depressive donkey of the Pooh books, writes Jonathan Guthrie.
It has paid more than £700m to settle charges relating to the manipulation of benchmark interest rates Libor, Yen Libor and Euribor. It was charged £95.8m by the US Securities and Exchange Commission for a $2.2bn residential mortgage-backed security it offered in 2007. Last month RBS agreed to pay US authorities $100m to settle accusations that it breached US sanctions in Iran, Sudan, Myanmar and Cuba.
Mr McEwan was keen to stress that the problems related to past mistakes.
“These conduct issues refer back to issues before the financial crisis,” he said. “I always knew we had to go through these issues – they’ve been pretty well flagged.”
The chief executive even used the bank’s ability to absorb the new shocks as a way to illustrate its strengthening financial position.
“We now have a stronger bank that can take these provisions and I think you will see in February that we have the strategy to take the bank on from here,” he said.
The numbers start to pale after a while. On Monday, Royal Bank of Scotland revealed that its fourth-quarter results would be hit with up to £8bn of “exceptional” charges. The bottom line was already in the red after the first nine months of last year, so RBS looks firmly on track to make one of its worst ever losses for the whole of 2013, writes Patrick Jenkins.
Analysts warned the extra provisions increased the pressure on RBS to raise capital by selling assets. The bank has already announced plans to offload its Citizens business in the US, which accounts for £65bn of its total £431bn of risk-weighted assets.
“McEwan’s whole rationale is going to be: ‘I want to get back to serving the retail banking and small business customers in the UK and anything that doesn’t fit with that will be sold or downsized’,” said Christopher Wheeler at Mediobanca.
And while the fresh wave of charges signalled that Mr McEwan was cleaning up the bank at a much faster rate than his predecessor Stephen Hester, they remained doubtful that this would be the end of RBS’s troubles.
Citigroup wrote in a note to clients that there was nothing in RBS’s statement to suggest it had drawn a line under the mortgage-backed securities, PPI or interest-rate swap issues. “All these conduct issues remain a continuing overhang and there is risk these provisions continue to come through,” it said.
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