Back to top

Analyst Blog

Recently, Royal Bank of Scotland (RBS - Snapshot Report) announced that it would set aside nearly £3 billion ($4.97 billion) for impending litigation claims related to mortgage-backed securities and other legal costs in the U.S., which were sold before the financial crisis.

The latest charge adds to £4 billion of charges that it announced in November 2013. We expect these to incur a significant loss for the bank when it reports final quarter and full-year 2013 results next month.

Royal Bank of Scotland was once the shining example of the banking system in Britain. However, when the banking crisis erupted, the British government was forced to bail out the bank with nearly £45 billion ($70 billion) – which was the biggest bailout in history. Six years down the line, the bank is 81% owned by U.K. taxpayers and still struggling to surmount all troubles.

Notably, Royal Bank of Scotland is one of the 18 banks being investigated by the Department of Justice in the U.S. over faulty mortgage sold to Fannie Mae (FNMA) and Freddie Mac (FMCC).

The bank also declared that it set aside an amount of £465 million ($766 million) in provision to cover claims related to the faulty sale of Payment Protection Insurance. The cumulative provision is £3.1 billion, of which £2.2 billion has been utilized as of 31 Dec 2013. The remaining provision of £0.9 billion covers the redress and administrative expenses of a year.

Additionally, Royal Bank of Scotland will keep £500 million to cover claims related to so-called interest rate hedging products sold to small businesses. The cumulative provision, including expenses, was £1.25 billion as of Dec 31, 2013.

In the fourth quarter of 2013, the company expects to incur additional impairment and asset valuation adjustments in the range of £4.0–£4.5 billion. This will result from the strategic creation of an internal bad bank, known as R.B.S. Capital Resolution – which was established on Jan 1, 2014.

Additionally, as of Dec 31, 2013, Third Party Assets were below the previous guidance of £35 billion, primarily due to increased level of non-core asset reduction.

In addition to all the above charges, core operating expenses in the fourth quarter will include £200 million of additional provisions for various conduct-related and legal expenses.

From the capital perspective, Royal Bank of Scotland continues to target a fully loaded Basel III Core Tier 1 ratio of 11% by the end of 2015 and 12% or more by the end of 2016. Additionally, the bank expects to report a Core Tier 1 ratio of around 11% as of Dec 31, 2013. On a fully loaded Basel III basis, the Group's equivalent Core Tier 1 ratio is expected to be between 8.1% and 8.5%.

Even though Royal Bank of Scotland is in troubled waters now, we are encouraged by its efforts to restructure its business. With the divestment of its non-profitable units, we believe that the bank will be able to overcome the challenges bracing it and regain its former glory.

Royal Bank of Scotland currently carries a Zacks Rank #3 (Hold). A better-ranked foreign bank is HDFC Bank Ltd. (HDB - Analyst Report) with a Zacks Rank #2 (Buy).

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
ERBA DIAGNO… ERB 3.80 +7.04%
BANCO DO BR… BDORY 14.74 +5.66%
AIR INDUSTR… AIRI 9.99 +4.15%
EQT MIDSTRE… EQM 98.14 +3.38%
WEATHERFORD… WFT 23.64 +3.10%