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RBS Posts Larger-Than-Estimated Loss on FX-Rigging Charge

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Royal Bank of Scotland Group Plc posted a larger loss than analysts estimated in the first quarter as Britain’s largest government-owned bank set aside more money for restructuring and currency-manipulation probes.

The net loss was 446 million pounds ($687 million) compared with a 1.2 billion-pound profit in the year-earlier period, the lender said in a statement on Thursday. That’s below the 175.5 million-pound loss estimate of four analysts surveyed by Bloomberg. Conduct and litigation charges were 856 million pounds, including 334 million pounds toward settling allegations traders manipulated key currency benchmarks.

Chief Executive Officer Ross McEwan, 57, is shrinking the bank’s trading division and retreating globally to focus on U.K. consumer and commercial lending as he strives to reverse seven straight annual losses. His progress is being hindered by rising costs related to past misconduct, delaying a sale of the government’s 80 percent stake in the Edinburgh-based lender.

“Overall, we’re very, very pleased with progress,” Chief Financial Officer Ewen Stevenson said in a video message posted on the bank’s website. “There is much to do this year and its going to be a continuing tough year financially and you’re going to see more quarters like this as the year pans out. But underneath it all our core bank is doing very very well now.”

Advanced Talks

Profit excluding restructuring costs and conduct and litigation charges was 1.6 billion pounds, up 16 percent from 1.4 billion pounds a year ago. That beat the 1.5 billion-pound average estimate of seven analysts surveyed by Bloomberg. Still, revenue dropped to 4.3 billion pounds in the first quarter from 5.1 billion pounds a year earlier.

The shares fell 2.2 percent to 341.7 pence at 8:20 a.m. in London. They have slumped 13 percent this year, trading below the 407 pence a share at which the government says it would break even on its 45.5 billion-pound bailout in 2008 and 2009.

RBS paid $634 million to two regulators in November, when a group of banks agreed to pay a total of about $4.3 billion to settle allegations they rigged currency markets. Barclays Plc, which wasn’t part of the settlement, on Wednesday set aside an additional 800 million pounds to cover a potential fine.

RBS said it expects to incur further financial penalties as it holds “advanced discussions” about reaching a settlement in the U.S. Department of Justice’s criminal probe into curency-rigging.

PPI Provision

The lender also set aside another 100 million pounds to compensate customers for payment-protection insurance they didn’t want or need, increasing the total cost of the scandal for RBS to about 3.8 billion pounds.

RBS’s “core franchise over the next few years is likely to expand earnings” once the “restructuring is over and interest rates normalize,” said Chirantan Barua, an analyst at Sanford C. Bernstein in London with an outperform recommendation on the bank’s shares. However this will be offset by “about 9 billion pounds that we think they bank will spend on litigation and restructuring over the next few years.”

The bank has benefited from strengthening economies in the U.K. and Ireland, boosting housing demand. RBS had a gain on impairments of 91 million pounds, reflecting “benign credit conditions” after a 362 million-pound bad-debt loss last year.

Securities Unit

McEwan has been seeking ways to strengthen the bank’s capital buffers ahead of a second round of Bank of England stress tests later this year after narrowly passing in 2014. The company had a common equity Tier 1 ratio, a measure of financial strength, of 11.5 percent at the end of the first quarter, up from 11.2 percent at the end of December.

The bank took a 453 million-pound charge for restructuring in the first quarter, mainly related to the overhaul of its securities unit. The investment banking division swung to an operating loss of 741 million pounds in the quarter, compared with a profit of 333 million pounds in year-earlier period.

“There are still many conduct and litigation hurdles looming on the horizon,” McEwan said on a call with reporters. “We’re doing what we said we would do this year, which is tidy up the business from a restructuring perspective and getting as much of the conduct and ligitation out of our way.”

(Source: Bloomberg)