Libor Fixing Scandal: RBS at a Crossroads

The Royal Bank of Scotland may have settled with US and UK authorities for a £390m ($612m/€451m) fine and pleaded guilty for criminal charges from its Japanese subsidiary but this is not the end of its woes.

While the resolution with a number of regulators marks a new era for RBS, the 83 percent-taxpayer-owned bank, has a number of issues that will cause it problems in the longer term.

The settlement with the US Commodity Futures Trading Commission (CFTC), the Department of Justice and the UK's Financial Services Authority (FSA) is only one of the finalised agreements, out of a number of other ongoing investigations, in the manipulation of one of the world's most important interbank lending rates.

The amount of costs it has - and will - accrue from litigation and compensation linked to a raft of mis-selling claims will also hit the bank's bottom line.

Meanwhile, the bank's leadership structure has also experienced a radical change that has -and will - impact its profitability. It's also led some to question the group's very survival without further government intervention.

Litigation Costs, Fines and Compensation

The unique situation for RBS is that it is primarily taxpayer-owned and lawyers have already told IBTimes UK that huge fines already seem counterintuitive.

In a press conference, RBS' CEO Stephen Hester and chairman Sir Philip Hampton said that the fines and costs would be clawed back from employees. However, there are plenty more costs to come.

Libor Fixing

While this notion may apply to the FSA portion of the fine, RBS will still have to answer regulators from different jurisdictions that are still probing the bank.

It already had to pay significant costs defending itself in New York and with the Singapore high court, after Tan Chi Min, the former head of delta trading for RBS's global banking and markets division in Singapore, alleged that managers condoned its staff to set the Libor rate artificially high or low to maximise profits.

It has since been determined that 21 traders manipulated and attempted manipulate of the interbank lending rate that was denominated in yen and Swiss francs between 2006 and 2010 across a number of countries.

Mis-selling Derivatives

Meanwhile, it also faces its earnings being hit from the costs associated with paying compensation to the thousands of UK businesses which were mis-sold interest-rate hedging products.

Fitch Ratings estimates the amount owed to businesses which were mis-sold interest rate swap agreements (IRSA) will be "manageable" but will still have a negative impact on its balance sheet over the next year or so.

The FSA's pilot scheme examined the sale of 173 so-called interest rate swap agreements (IRSAs) to British firms, and found that at least 90 percent did not comply with at least one regulatory requirement in its findings last week.

While some 40,000 IRSAs sold to UK businesses are said to be eligible for review, the pilot scheme was aimed at assessing a select number of cases to test the range of disputes and assess the scale of redress for customers mis-sold these complex derivatives.

Although the final amount has not been quantified, it has already had to pay a raft of litigation costs to defend itself in court, where complainants have bypassed the scheme and gone straight for the litigation route.

PPI Compensation

The whole UK banking industry is already facing a £12bn bill over paying back customers who were mis-sold payment protection insurance (PPI).

This month, IBTimes UK reported that the FSA was discussing with the banks on whether they should implement a deadline to PPI claims in order to slow down the backlog in disputes and billions of pounds in payouts.

While RBS has already set aside more for PPI compensation, it is not unthinkable for the bank to increase again provisions over time.

For example, Barclays, which is also facing similar compensation payouts for mis-sold PPI customers, increased its provision again this week and just hours before its CEO Antony Jenkins and chairman Sir David Walker gave evidence to MPs over banking standards.

Banking Structure, Profitability and Bonuses

At the press conference, Hester called his time at the bank a "four-year soap opera".

After joining in 2008, Hester was tasked with turning around the bank during a time Hampton called an "absolutely horrendous mess".

"When I joined the bank, I was brought in to clean up a huge mess and I believe that RBS has made incredible progress over the years. This has been a soap opera for four years [but] I took on a big task and my responsibility is to complete that task," said Hester.

Since then, some £600bn of assets has left RBS since the fourth quarter of 2008.

While RBS Group operating profit rose 11 percent in 2011 from the previous year, the level of compensation and bad debt writedowns led to the bank falling into the red.

In 2012, the bank's results revealed a net loss of £1.38bn in the third quarter, compared with £1.23bn the previous year - significantly below analyst expectations in the third quarter,

The bank's total losses for the first nine months of 2011 reached £3.4bn, compared to a £1.2bn profit in the same period in 2011.

In tandem with these events, Hester substantially restructured the group and pared down its more profitable investment banking arm.

The group has now lost its previous jewel in its crown - John Hourican - after he took full responsibility for the Libor misconduct, despite having "no involvement, knowledge or culpability" for the 21 traders' actions.

Over the past 5 years, its share price has fallen 91 percent. Lloyds Banking Group, which is 42 percent-owned by the taxpayer, has fallen around 88 percent.

Lloyds' chief executive, António Horta-Osório, declined his 2011 bonus.

Hester received a bonus for 2010 and at the conference, Hampton said: "Stephen [Hester] has only had one bonus in four years and this is severe enough."

This, despite, thousands of other staff members being asked to forfeit their own bonuses to fund the Libor-rigging fine imposed on the bank.

So despite the clawbacks, how will the bank fare in the longer term when its profitable investment banking arm is shrunk further, as confirmed by Hester, and fines and litigation costs mount?

Will Hester relinquish another bonus? Or do we expect the bank to eventually become 100 percent owned by the taxpayer?