Royal Bank of Scotland Group took a surprise 3.6 billion-pound ($5.2 billion) hit to the value of its assets and set aside more money for past misconduct, limiting Chief Executive Officer Ross McEwan's ability to return capital to shareholders.
Measures to plug a pension deficit will hurt the tangible net asset value by 1.6 billion pounds in the fourth quarter, RBS said Wednesday, a month before its scheduled full-year earnings. It also took a 1.5 billion-pound charge ($2.1 billion) tied to a U.S. mortgage-backed securities lawsuit and 500 million pounds for wrongly-sold payment protection insurance, pushing it into a full-year loss for 2015.
McEwan, 58, is facing a pivotal year in his efforts to resume dividends for the first time since the bank's 45.5 billion-pound taxpayer-funded bailout at the depth of the global financial crisis. Analysts at JPMorgan Chase & Co. said in a note that the latest charges could cut the size of a share buyback by 40% to 6 billion pounds in 2018, a year later than RBS targets for payouts to shareholders.
"It's a setback, but hardly fatal," said Ian Gordon, an analyst at Investec Plc with a buy rating on the shares. "There is some incremental bad news here which will cap the scale of the 2017 buyback."
The shares slumped as much as 5.7%, the biggest intraday decline since August, and traded at 251 pence at 1:00 p.m. in London, down 3.8%. RBS has decreased about 17 percent this year.
RBS said it would alter the accounting policy for its pension program, which will reduce capital buffers. In addition, the bank said it would make a 4.2 billion-pound payment into its defined-benefit pension program in the first quarter to accelerate contributions that it would otherwise have made through 2023. The pension program has about 220,000 members and closed to new staff about a decade ago.
The lender took a charge for the lawsuit from the U.S. Federal Housing Finance Agency after recent settlements by other banks, Chief Financial Officer Ewen Stevenson said on a call. The provision does not relate to a probe over mortgage-securities from the U.S. Department of Justice, while the bank doesn't have any indication for the timing of any settlements, he said.
RBS made the mortgage-backed securities provision after similar deals cut by Barclays Plc and the Wachovia Corp. unit of Wells Fargo & Co. with the U.S. National Credit Union Administration over similar cases of alleged wrongdoing, as well as a $5.1 billion provision made by Goldman Sachs Group Inc. for settlements with various U.S. authorities.
"We see the pension change as a clear negative," said Mark Phin, an analyst at Keefe, Bruyette & Woods in London with a market perform recommendation on the shares. "There is still no provision made for the ongoing DOJ/Attorney General investigations, so there will be more to come in our view."
The increase in PPI provisions come as the U.K.'s Financial Conduct Authority considers imposing a deadline for consumer complaints to put an end to the country's costliest banking scandal since the financial crisis. RBS's charge should be "sufficient to cover the costs" to the proposed time limit in early 2018, McEwan said.
The charge to cover the bank to the proposed deadline is likely to be followed by other British lenders including Lloyds, Andrew Coombs, an analyst at Citigroup Inc., wrote in a note to clients. Banco Santander SA's U.K. unit said on Wednesday it took a 450 million-pound charge in the fourth-quarter for wrongly-sold PPI, citing the FCA consultation.
RBS also said it set aside 498 million pounds to write down the value of its private-banking business in the fourth quarter, hurt by low interest rates, rising taxes, pressure on profitability margins and higher capital allocations. The move won't have an impact on the bank's net asset value or capital buffers, with the common equity Tier 1 ratio, a measure of financial strength, seen at 15 percent at the end of 2015, it said.
The 2.5 billion pounds in combined costs of the U.S. mortgage-backed securities provision, PPI charge and private- banking write-down will push RBS to a full-year loss for 2015, McEwan said.
RBS "made it quite clear with the heavy restructuring that we had going on in the business in 2015, plus these additional provisions, yes there will be a loss," he said.
While RBS has posted some profitable quarters since 2008, conduct charges and writedowns have pushed it into a string of annual losses since its bailout. The bank still sees a return to distributing capital early next year, Stevenson said.
Investors should "expect a few more bumps in the road this year" as the bank works through a "bunch of legacy issues," he told analysts on a call. "There is a path for us settling most of that this year if we can."
To win regulatory approval to pay a dividend or buy back shares, the CEO must complete the bulk of his restructuring program this year, pass the central bank's annual stress test in December and reach a settlement in the U.S. He will also have to pay 1.2 billion pounds to the U.K. government to remove its dividend access share, which gives the state rights to a preferential payout.
"I am determined to put the issues of the past behind us and make sure RBS is a stronger, safer bank," McEwan said in the statement. "We will now continue to move further and faster in 2016 to clean up the bank and improve our core business. This announcement is a further step toward addressing legacy issues."
The lender is scheduled to report full-year earnings on Feb. 26.