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 RBS, 82 percent owned by the UK government, revealed the new
provisions in a profit warning rushed out on Monday, which is likely
to leave the bank with a 7- 8 billion pound ($13.26 billion) loss
for 2013.
The bank was already planning a partial flotation of Citizens this
year and to sell the entire business by the end of 2016. Analysts
value it between $9 billion and $15 billion.
RBS's capital position is under strain from the new charges, higher
regulatory standards and also because the bank is not rebuilding
capital as quickly as planned. 2013 will mark RBS's sixth successive
loss-making year following its 45 billion pound taxpayer bailout in
2008.
CEO McEwan had lifted RBS's capital targets in one of his first
moves in November, saying he wanted to dispel any impression that
RBS was "travelling light" on capital.
His aim is to lift RBS's core Tier 1 capital ratio — a measure of
financial health — to 11 percent by the end of 2015 and to 12
percent or more a year later, based on international bank capital
rules known as Basel III.
But RBS said on Monday that ratio would drop to between 8.1 and 8.5
percent at the end of 2013, below the minimum 8.5 percent which
regulators want it to hold by the start of 2016. Banks are also
expected to hold an extra cushion above the minimum, and investors
expect most big lenders to hold 10 percent or more.
"The range (8.1-8.5 percent) looks low as compared to the 11.5
percent level that we think the bank will need as a largely domestic
UK and Irish bank," Bernstein analyst Chirantan Barua said.
RBS Finance Director Nathan Bostock said on Monday the bank had two
components that were crucial for the bank's capital in future — an
accelerated run-down of loans under a "bad bank" unveiled in
November and the sale of Citizens.
Bostock said on top of proceeds from selling shares in the U.S.
bank, the capital ratio would get a significant boost when the sale
is completed by the removal of Citizens' risk-weighted assets from
RBS's balance sheet. That could encourage it to hurry up the
process, as Citizens' risk-weighted assets account for about 14
percent of the RBS group.
Bernstein's Barua said the Citizens sale, along with improving
economic conditions in Britain, could add 150 to 200 basis points to
RBS's capital ratio.
"Are there any risks? If the UK macro reverses or the Citizens IPO
(float) is botched, the capital level will come under regulatory
pressure. However, both risks look unlikely to us," he said.
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Citizens, with about 1,400 branches across New England, the Mid-West
and Mid-Atlantic states, could be attractive to a range of local
rivals.
Analysts said RBS's private bank Coutt's could also be sold, but
there were few other significant assets it could tout.
McEwan had already said RBS would take a provision of 4-4.5 billion
pounds in the fourth quarter for losses at its bad bank. He also
said on Monday the scale of bad decisions before and during the
2008/09 crisis meant some problems were only just emerging.
RBS shares rose 1.1 percent to 336 pence by 1044 GMT after falling
to a one-month low on Monday. They are one-third below the 500p
average price the government paid for its shares, leaving the
taxpayer sitting on a 15 billion pound loss.
Analysts said Monday's charges brought forward substantial
litigation costs that had been expected from 2014 onwards, and
modestly raised the overall total expected.
Morgan Stanley estimated RBS would take 10.5 billion pounds of
conduct and litigation costs between 2013 and 2016.
"Although the Q4 charge is higher than we expected, we see this as
mainly a phasing issue, with lower future charges," analyst Chris
Manners said.
Including a fine for Libor benchmark manipulation and previous
charges for payment protection insurance and interest rate swaps mis-selling,
RBS's bill for conduct and litigation last year will be about 4
billion pounds.
All UK banks are expected to take more provisions to cover PPI and
swaps mis-selling, while regulators are investigating the possible
manipulation of foreign exchange markets and banks face civil suits
for compensation from Libor rigging. ($1 = 0.6034 British pounds)
(Editing by Jane Merriman)
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