RBS May Face Extra $15.4 Billion of Misconduct Charges

by Richard Partington, Bloomberg Royal Bank of Scotland Group Plc may have to set aside 10 billion pounds ($15.4 billion) in additional conduct costs, following probes into currency market rigging and U.S. mortgage-backed securities, Keefe Bruyette & Woods Inc. said. The U.K.’s largest state-owned lender may take 2.6 billion pounds of charges to settle foreign-exchange and other regulatory investigations in benchmark rigging, analysts Mark Phin and Richard Smith wrote in a note to clients. Shareholder lawsuits over a 2008 fundraising just before the bank was bailed out could cost as much as 4.4 billion pounds, they wrote. Chief Executive Officer Ross McEwan, 57, has said his bank still faces “bumps in the road” as he seeks to return the lender to annual profit more than six years after taking a bailout from taxpayers. Fines for past misconduct could threaten his plan to return the 80 percent government-owned lender to full private ownership. “RBS looks one of the most exposed European banks to litigation and conduct risk,” the analysts wrote. “It will take time to gain comfort over the ultimate costs.” The 10.1 billion-pound total includes a possible 1.8 billion-pound provision to settle claims of misconduct in its handling of U.S. mortgage securities. The lender is bracing to settle the Federal Housing Finance Agency’s accusations it sold faulty mortgage bonds to Fannie Mae and Freddie Mac from 2005 to 2007, a person with knowledge of the matter has said. RBS, based in Edinburgh, may also have to provide 1.1 billion-pounds to compensate customers who were sold payment protection insurance, or loan coverage, they didn’t want or need. Stock Downgraded RBS shares fell 1.5 percent to 383.3 pence at 2:32 p.m. in London trading, below the 407 pence at which the government says it would break even on its 45.5 billion-pound bailout in 2008 and 2009. The shares are down 2.9 percent this year. Britain’s largest banks are working to put allegations of past wrongdoing behind them at a time when profits could be squeezed by low interest rates. That’s because when rates rise, lenders try to raise the amount they charge for loans faster than what they pay on deposits to increase their margins. RBS is hurt most by the Bank of England keeping its key interest rate at a record-low, Ian Gordon, an analyst at Investec Plc in London wrote in a note to clients Monday. He downgraded his rating on the shares from hold to sell. “We regard market expectations around interest rate developments as singularly unhelpful for RBS,” Gordon wrote.

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