Latest RBS hit may speed up sale of U.S. arm Citizens

LONDON Tue Jan 28, 2014 9:12am EST

A man walks past a Royal Bank of Scotland building in central London January 28, 2014. REUTERS/Paul Hackett

A man walks past a Royal Bank of Scotland building in central London January 28, 2014.

Credit: Reuters/Paul Hackett

LONDON (Reuters) - Royal Bank of Scotland's (RBS.L) latest 3 billion pound hit for past misdeeds will leave the state-backed bank low on capital, potentially pushing new boss Ross McEwan to speed up a sale of its Citizens banking business in the United States.

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.

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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