Fines and compensation payments expected to push both state-backed banks into loss
Royal Bank of Scotland (RBS) and Lloyds Banking Group are both expected to report further significant annual losses in results due next week.
Banking analyst Ian Gordon at Investec Securities expects RBS will announce losses of around £3.9 billion next Thursday as the 81 per cent taxpayer-owned bank, bailed out to the tune of £45.5 billion, counts the cost of mis-selling insurance and fines linked to its role in rigging inter-bank lending rates.
And Gordon is predicting Lloyds Banking Group, which remains 41 per cent state-owned after receiving bailouts totalling more than £20 billion in 2008, will report losses of £1.4 billion when it publishes its results next Friday.
However, the consensus loss figure for Lloyds among analysts is around £544 million.
Earlier in the month Barclays Bank reported a 96 per cent fall in profits to £246 million – down from £5.9 billion the previous year – just days after announcing it was setting aside a further £1 billion to meet compensation claims for mis-selling products.
The bulk of the drop – £4.6 billion – was down to Barclays writing down the value of its own debt.
On an adjusted basis, stripping out fines, compensation and debt revaluation, Barclays said profits were up 26 per cent to £7.05 billion.
Alongside its annual results Barclays also announced plans to cut 3,700 jobs in an effort to reduce costs by £1.5 billion by 2015.
Taxpayers are currently sitting on a paper loss from their investment in RBS and Lloyds of around £14 billion as shares remain below the £5 break even price paid by the government.
There is also speculation RBS has hit further troubles in trying to offload the 316 of its branches to appease EU rules on state aid.
Following the collapse of the sale to Santander, RBS is now said to be looking at selling a minority stake to private equity and institutional investors to kick-start the auction process.
Lloyds is also rumoured to be facing problems with its 632 Project Verde branch sale amid doubts the deal with The Co-operative Bank will succeed in time.
RBS reported a loss of £2 billion for the 2011 financial year, though stripping out bad debts and one-off charges including £850 million in PPI claims, the core bank division - including NatWest - posted a profit of £6.09 billion against profits of £7.4 billion the previous year.
Last November RBS announced a further £400 million in claim provisions relating to payment protection insurance and another £50 million to cover its computer system failure which left millions of people without access to their bank accounts.
RBS is also having to "meaningfully increase" the £50 million provision it has made for mis-selling interest rate hedging products.
And last October RBS left the government's asset protection scheme (APS), despite the scheme still harbouring high risk assets valued at £120 billion.
The APS protected RBS if first losses from its toxic assets exceeded £60 billion – a figure the Treasury was forced to raise from an initial first loss figure of £42.2 billion.
Under the rules of the scheme, had RBS's losses surpassed £60 billion, the taxpayer had guaranteed 90 pence on the pound for the rest of the RBS toxic asset book.
The bank had reduced the assets held in APS to around £120 billion at the time of its exit, meaning the £60 billion first loss figure APS provides protection had, according to RBS chief executive Stephen Hester, by then become “essentially worthless”.
RBS left the scheme in October 2012 just days before it would have been liable to pay a further £125 million premium to the Treasury.
RBS is also reported to be lining up bonus payments for its top executives despite the bank having agreed to pay US and UK regulators fines totalling £390 million for rigging the The London InterBank Offered Rate (LIBOR) from 2006 to 2010.
The LIBOR rate governs the price of more than $500tn-worth of loans and transactions around the world, including household mortgages.
Barclays was also fined £290 million for its role in the rate rigging scandal.
Lloyds Banking Group has yet to announce any provision for its role in the LIBOR fixing scandal or mis-selling interest rate swaps.
Its chief executive, Antonio Horta-Osorio, is reported to be in line for a bonus and incentive package worth around £4.4 million.