In a statement rushed out late yesterday (27 January) to soften the blow of its official results announcement next month, Royal Bank of Scotland (RBS) has revealed that it is heading for a pre-tax loss of between £7bn-£8bn after setting aside an extra £3bn to cover litigation and compensation costs.
The retail bank, which was rescued from collapse by the Government in 2008 at the height of the financial crisis and continues to be dogged by claims arising out of that era, has set aside £1.9bn to cover ‘various claims and conduct related matters affecting group companies, primarily those related to mortgage-backed securities and securities related to litigation, following recent third party litigation settlement and regulatory decisions.’
A further £465m has been set aside to cover the bank for its mis-selling of payment protection insurance and related costs, which have continued at a rate of around £225m per quarter ‘rather than declining as anticipated.’ Claims are now forecast for a longer period, with the cumulative provision now £3.1bn, of which £2.2bn had been utilised as at 31 December 2013.
The bank has set aside another £500m for mis-selling of interest rate hedging products and administration costs, reflecting ‘both higher volumes and anticipated redress payments, recalibration of our methodology based on experience during Q4 2013, and additional administration charges.’ The cumulative provision was £1.25bn as at 31 December 2013.
The government currently hold 81% of the bank’s shares, which fell following yesterday’s news of the losses, with chief executive Ross McEwan and eight members of the executive committee waiving their bonuses for 2013.
McEwan said in yesterday’s statement: ‘Billions of pounds have been spent to resolve conduct and litigation issues in recent years. Costs on this scale were not predicted by anyone when RBS was rescued in 2008. They come in addition to the costs of restructuring the bank’s bad assets and restoring its funding to prudent levels after the financial crisis.’
RBS’ 21-strong legal panel includes includes Clifford Chance (CC), Allen & Overy, Freshfields Bruckhaus Deringer and Linklaters as well as many of the larger City and transatlantic firms such as Eversheds, Hogan Lovells and Norton Rose Fulbright, which could benefit if this latest announcement triggers a further sell off of RBS assets to improve its capital position.
The losses come after Deutsche Bank earlier this month blamed its 2013 litigation expenses of €2.5bn for its fourth quarter pre-tax loss of €1.2bn.
In October 2013, JP Morgan suffered a rare quarterly loss after setting aside $9.2bn in legal fees.