Updated March 29 at 6:27pm

RBS loss widened in 2012 on swaps, PPI redress provisions


LONDON - Royal Bank of Scotland Group PLC, Britain’s biggest taxpayer-owned lender, posted a wider full-year loss after it set aside an additional 1.1 billion pounds ($1.6 billion) to compensate clients wrongly sold insurance and interest-rate hedging products.

The net loss swelled to 5.97 billion pounds ($9.08 billion) from 2 billion pounds ($3.04 billion) in the year-earlier period, RBS said in a statement today. Analysts had predicted a loss of 5.1 billion pounds ($7.7 billion), according to the median estimate of nine surveyed by Bloomberg News. RBS also said it will sell a stake in its Citizens unit in the United States and shrink its investment bank to boost capital.

The costs of redress for past missteps are hobbling CEO Stephen Hester’s attempts to revive profit at the lender, which received the biggest banking bailout in the world in 2008. The government is pressing the Edinburgh-based lender to sell more assets and bolster capital as it tries to recoup some of its 45.5 billion pounds ($69.2 billion) investment in the lender.

2012 was a “chastening year” as the bank worked to “put right past mistakes,” Hester, 52, said in a statement. “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.”

Fourth-quarter operating profit tumbled 45 percent to 581 million pounds ($883.9 million), while full-year revenue dropped 6.9 percent to 25.9 billion pounds ($39.4 billion) in 2012. RBS said it expects growth in the U.K., its biggest market, to remain subdued.

Shares drop

The shares fell 6.6 percent to 323.90 pence in London, their steepest decline in eight months. The stock has dropped 0.2 percent this year, making RBS the U.K.’s worst-performing bank stock. The government paid about 502 pence a share for its 81 percent stake.

“These results look pretty weak in terms of revenue, and the outlook for the business doesn’t look great either” said Shailesh Raikundlia, a London-based analyst at Espirito Santo Investment Bank who rates RBS a sell. “Their very low capital position is a big concern for us. All of these one-off hiccups they keep reporting are killing their capital.”

The firm’s core Tier 1 capital ratio, a measure of financial strength, rose to 10.3 percent at the end of December. Under the stricter Basel III rules, the measure stood at 7.7 percent, less than the 8.5 percent minimum those regulations will require. RBS will boost that ratio to closer to 9 percent this year, Chief Financial Officer Bruce Van Saun said.

Branch sale

Bank of England Governor Mervyn King said in November that U.K. banks may need to build up the capital they hold against potential losses and asked the Financial Services Authority to investigate and report back in March.

“We did reach an important accommodation in recent days with the government, our majority shareholder, and the regulators in relation to their well-publicized concerns across the industry on capital,” Hester said. “The two revisions to our strategy that go with that are a further shrinkage of our markets business, with the capital there coming down significantly further over the next couple of years” and the intention to start selling Citizens, Hester added.

RBS will sell a 25 percent stake in Citizens Financial Group Inc., the U.S. consumer and commercial lender it acquired in 1988, in two years. The lender also plans to sell the 316 branches regulators are forcing it to offload through an initial public offering, Hester said. RBS has approached the European Commission about extending the 2014 deadline for the sale.

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