RBS is the latest major UK bank to unveil losses brought on by setting aside another £400m for its payment protection insurance (PPI) compensation pot. In tandem predicts that it is close to settling with regulators over Libor fixing allegations.
While its greatest perceived competitor Barclays also reported a major slump in profits, after also adding another £700m to its own PPI payout fund, RBS' performance and operating model is substantially different.
RBS is 83-percent owned by the taxpayer and it has already hacked and slashed a number of its operations over the last year or so, in order to accommodate a major restructuring of the group.
Under the terms and conditions of its £45bn bailout package in 2008, RBS is under obligation to sell the 316 branches by 2014. Santander, Spain's biggest lender, was in advanced discussions to buy the RBS branches, which have a total of 1.8 million customers, for £1.7bn but it pulled out of the deal in the final hour.
Unlike Barclays, RBS has abandoned efforts to becoming a truly global bank after governmental pressure and Basel III capital requirements has meant that it has to pare down its risky assets, which has led to another 4450 job cuts and on top of the 34,000 job cull since Chief Executive Stephen Hester was brought in to turn the bank.
In turn, while the announcements don't like to use the word 'downsize,' it has in fact, done just that. It will exit mergers and acquisitions, cash equities, corporate broking and equity capital markets businesses.
Will RBS Still Stay Viable?
RBS, like Barclays and Lloyds, is facing a number of investigations into the manipulation of Libor, mis-selling derivatives and PPI.
While Hester aired a tone of being beaten down by the regulators by saying "we have, in the end, [had] to dance to the tune of the regulators," it's a signal that the bank will have to cough up more cash to the watchdogs and to the general public if it has been found of wrongdoing.
Barclays settled for a record fine of £290m with US and UK regulators for rigging rates and market participant consensus says that it will probably be around the same amount.
"The group expects to enter into negotiations to settle some of these investigations in the near term and believes the probable outcome is that it will incur financial penalties," said RBS.
However, whatever the final civil penalty amount will be, it will be added to the various number of other potential losses, generated from mis-selling derivatives, PPI and specific to the institution - the dispute over the rights issue.
While banks like Barclays still report strong profits, only to make a loss on chunky litigation settlements, RBS is in a different situation where losses in the first nine months of the year have now reached £3.4bn, compared to a £1.2bn profit in the same period in 2011.
Regardless of the press release stating that RBS made a third-quarter operating profit of £1.05bn, up from £2m from the same period the previous year, if wave after wave of settlement fines are added, what will it mean for the bank?
Will We Be Bailing out RBS Again?
Stepping aside from Libor fixing, RBS faces a number of major hurdles to overcome, over the next few years.
As widely covered in IBTimes UK, the mis-selling derivatives scandal is still unfolding and provisions over customer redress is not fully estimated.
Over 40,000 interest rate swap agreements (IRSA) have been sold in the UK and due to every product being different in size, terms and conditions, break costs and tenure, mean that each product is being investigated separately by the banks and an independent reviewer.
However, since under the 29 June FSA agreement the banks are in charge of this review and in determining levels of compensation, under no specific deadline, it has led to a raft of small-to-medium enterprises (SME) taking the banks to courts.
So far, RBS has only set an initial estimate of £50m, while Barclays has silo-ed £450m to cover the cost of possible compensation customers that have been mis-sold IRSAs. Lloyds has still declined to give a figure.
While it may seem a positive move that RBS has only set aside a seemingly meagre amount, compared to PPI payouts, I believe it is more concerning that the scope and scale of the mis-selling derivatives fallout has not been properly digested.
A number of SMEs have already and are taking banks to court over IRSA disputes and many are looking for refund of the payments made on the swaps, as well as damages and to exit the contract at no extra cost.
Even on a basic maths calculation of taking half of products sold, refunding just the payments SMEs made and awarding modest damages, this could result in billions of pounds.
Sources already told IBTimes UK that the FSA and banks had been worried about the solvency of UK banks, should there be a large amount of payouts rewarded.
Sources close to a number of cases have also said settlements have been in the region of at least six figures.
Meanwhile, Guardian Care Homes is taking Barclays to court over £38m in damages for two swaps it bought from the bank, which is tipped to indicate what other banks, such as RBS and Lloyds can expect.
For instance, if RBS had to settle with a single, similar client and for a similar amount, it will nearly suck up all of the money it set aside for claims.
Rights Issue: Tipping Point?
One major challenge RBS will have to face in the next year, is when RBoS Shareholders Action Group officially launches its £3.5bn to £4bn lawsuit against Royal Bank of Scotland Group Plc and three ex-senior executives, Fred Goodwin, Tom McKillop and Jonny Cameron by the end of this year.
Sources close to the action group, which comprises 10,000 stockholders and around 80 institutions, told IBTimes UK exclusively that the consortium has nearly completed up to £20m worth of litigation liability cover, which is needed in order to prove that the plantiffs can pay for legal costs should it lose a case.
"Everything hangs on the funding and I hear that they are close to completing it. Once liability cover is completed, the group should be able to press on with filing a lawsuit against the banks and executives which is estimated to be in a month or so," say sources.
The £4bn lawsuit could mean a quarter of total £12bn raised in the RBS rights issue in 2008. If the group does raise £20m, it will also be the largest amount of liability cover raised for a lawsuit in the UK.
Shareholders have lost over 90 percent of their money since RBS launched its rights issue.
The RBoS Shareholders Action Group is claiming its members bought the shares under false pretences as the bank did not fully disclose how frail the bank's health was in its prospectus, which then led to the government bailing it out.