Wednesday 28 December 2016

Big Banks Are Facing A Totalling Of Uncertainty Here Is Why

big banks

Royal Bank of Scotland (RBS) approaches 2017 with uncertainty continuing to cloud its outlook, as the prospect of a multi-billion fine in the US over the sale of mortgage-backed securities looms on the horizon.

The bank has endured another torrid year stemming from the conduct of parts of its operations prior to the global financial crash of 2008 and subsequent £45 billion bailout by UK taxpayers.

Chief executive Ross McEwan and his team have spent 2016 fire-fighting on a variety of fronts. Earlier this month the bank agreed to pay £800 million to settle out of court with three of the five shareholder groups pursuing the bank over its £12 billion rights issue of 2008. The bank, still 73 per cent owned by UK taxpayers, remains hopeful of striking deals to stop the outstanding action coming to court in the early part of 2017.

This year has also seen the bank’s reputation dented by a long-awaited report into the treatment of small businesses by its Global Restructuring Group. Mr McEwan, speaking before the Financial Conduct Authority published its report, conceded its behaviour “didn’t meet the standards we set for ourselves”, although the watchdog ultimately cleared it of the most serious allegations.

Mr McEwan’s comments came as the bank booked further provisions for mis-selling PPI (payment protection insurance) as it unveiled first-half losses of nearly half a billion pounds in October.

And that came shortly after it reached a £1.1bn (£846m) settlement with the National Credit Union Administration Board, relating to two cases of mis-selling mortgage-backed securities.

Added to this was the bank’s unconvincing performance in the latest Bank of England stress tests, which found that Royal Bank may not be able to withstand a severe shock to the economy.

For all the difficulties it faces, the bank, which last week was fined a total of £13.5m by the Swiss Competition Commission for its role with other banks in influencing interest rates, insists the “culture at RBS has changed dramatically” since the days up to and around the financial crash.

But there remain significant “legacy” issues for it overcome before there is any chance of taxpayers getting back the money they invested to save the bank.

Laith Khalaf, senior analyst at Hargreaves Lansdown, fears 2017 will have “more of the same” in store for the Edinburgh-based lender. He said the “two key things to look out for on RBS in 2017” are a potential, multi-billion fine from the US Department of Justice (DoJ) over the mis-selling of mortgage-based securities, and whether it finally manages to offload its Williams & Glyn branch network – a condition imposed by the European Union on the bank’s bailout by the government.

On the prospect of a hefty fine in the US, Mr Khalaf said Royal Bank was “on the same boat as Deutsche Bank on that front”. The German bank agreed last week to pay the DoJ $7.2bn to settle its involvement in mis-selling mortgage-backed securities before the financial crash. “That’s one thing to look out for and it is something that has been hanging over Royal Bank of Scotland for some considerable time now,” Mr Khalaf said. “That is problematic because it is unquantifiable – you can’t really model what a regulator is going to do in terms of imposing fines.”

Equally, Royal Bank appears to be no closer to resolving the future of its 300-branch Williams & Glyn network. The bank has been pursuing a trade sale of the branches after abandoning moves to spin it off as a standalone bank. However Santander has twice walked away from negotiations, while there has been no update on the bid from Clydesdale Bank owner CYBG since it was lodged in October.

Noting that RBS has said it is unlikely to meet the 2017 deadline for selling the branches, Mr Khalaf said: “The problem for RBS is that everyone knows they are a forced seller of these assets.”

Lloyds Banking Group, by contrast, is closer to making a full return to private hands. The Bank of Scotland owner was also the recipient of a government bailout, but ministers are now mulling plans to sell off the final tranche of the public’s shareholding early in the New Year. The government’s stake was reduced to below seven per cent earlier this month.

“Lloyds is in better shape,” said Mr Khalaf. “The share price has been negatively impacted by the Brexit vote. But in terms of the progress the business has made, it is much further head of RBS or indeed Barclays.”

Yet while the immediate prospects look better for Lloyds, which unlike Royal Bank has also resumed dividend payments, Mr Khalaf said all banks will feel pressure this year from lower interest rates and the prospect of muted economic growth. Asked about the impact of Brexit, Mr Khalaf said it will be depend on how the economy responds to the prospect of the UK exiting the EU.

Highlighting the fact that the Bank of England and the Office for Budget Responsibility have revised forecasts for growth in 2017 downwards, he said the big risks to banks are from rising unemployment, bad debts escalating and house prices falling.



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