Part-nationalized RBS posts huge loss after provisions for compensating customers and fines

LONDON – Part-nationalized Royal Bank of Scotland said Thursday it ended 2012 with massive losses after it set aside more cash to compensate customers who were mis-sold financial products and to pay fines related to a rate-rigging scandal.

The bank, which is 82 per cent owned by British taxpayers, said its fourth quarter losses increased 44 per cent from a year earlier, to 2.60 billion pounds. That led to a full-year loss of 5.97 billion pounds ($9 billion), up from a shortfall of 2 billion pounds in 2011.

It set aside 1.8 billion pounds to compensate customers who were mis-sold insurance and interest-rate hedging contracts. It also paid a 381 million pound fine for its role in rigging the London Interbank Offered Rate, which is used to price mortgages and credit cards around the world.

Chief Executive Stephen Hester focused on the progress RBS has made in its restructuring process — even as he acknowledged that it would take time to rebuild public trust dented by what he described as a “chastening year.”

“Along with the rest of the banking industry we faced significant reputational challenges as we worked with regulators to put right past mistakes,” he said in a letter to shareholders. “We are determined to overcome the cultural and reputational baggage of pre-crisis times with the same focus we have applied to the financial cleanup from that era.”

The bank cut down on bonus payments to staff, which amounted to 679 million pounds in 2012, from 789 million the year before.

Hester said the effort to restructure the bank, which was bailed out by the government in 2008, was entering the final phase, and that it would return to private ownership in the next few years. That time frame is important, because it would make it possible to relieve the taxpayer of its burden before the next parliamentary election, set for 2015. He also announced that it was time to begin preparing for the partial sale of its U.S.-based Citizens Bank, which will probably take place in about two years.

RBS suggested that when investors take into account the one-time costs — such as paying the LIBOR fine — the bank is in much better shape than it might look. Operating profit, a measure of earnings before tax and one-time charges, rose to 3.46 billion pounds last year from 1.82 billion pounds.

“I think we are coming really closer to the point where we are a normal company again,” Hester told the BBC.

Various factors are slowing the bank’s rebuilding effort — the poor state of the economy in Britain and the United States, “reputational” damage from the rate-rigging and payment protection insurance scandals, and the technical glitches of last year that caused problems for customers using online banking and debit cards, Hester said.

One of the biggest hits came from the LIBOR scandal, in which employees at RBS and other banks tried to manipulate the rate that affects trillions of dollars in global financial contracts. That prompted anger among British lawmakers, who insisted on sweeping changes to oversight of the banking industry and called for tightening laws to make it easier to prosecute rate-fixing offences.

Analysts such as Ian Gordon of Investec summed up his view in a note to investors with the headline “Where do we go from here?” — suggesting that despite Hester’s optimism that the worst was behind them, uncertainty remains.

“RBS is capable of recovering over time … ,” he said. “There is, however, a fair amount of hope built in there!”