MORE pressure will be piled on Royal Bank of Scotland and Lloyds this week when they post further losses on the back of product mis-selling scandals.
RBS is expected to report a £1 billion bottom line loss while Lloyds is likely to reveal it also remains mired in the red.
Hefty headline third-quarter losses will raise doubts about the banks’ recent suggestions that 2013 will be their last year of post-crash restructuring before a resumption of dividends to long-suffering shareholders.
Ian Gordon, banking analyst at Investec, who recently downgraded RBS’s shares to a “sell”, said: “I have downgraded RBS because I believe the market is getting ahead of itself.
“The bank leaving the government’s toxic asset insurance scheme recently was interesting, but it did not change anything in terms of trading. RBS’s timeline of recovery remains painfully slow.
“I don’t believe the bank’s return on equity will be above 2 per cent next year, and only 4 per cent in 2014. Some people have been putting a positive spin around both Royal Bank of Scotland and Lloyds shares recently. But you are looking at 2014 before any dividends are likely to be seen, and potentially later in the case of RBS.”
Gordon forecasts a £1bn pre-tax statutory loss in Q3 for RBS, against a £100 million loss in the previous quarter.
In the same quarter last year the bank made a £2bn profit due to positive technical accounting moves relating to the fair value of its own debt.
At the underlying operating level, Gordon has pencilled in a £697m profit, ahead of a £650m profit in Q2 and a £2m profit in the same quarter of 2011.
The City expects RBS to take further provisions of about £500m for mis-selling – about £300m related to Payment Protection Insurance (PPI) and £200m on inappropriate interest rate swaps to small businesses.
“We don’t think RBS will take anything like the extra £700m Barclays recently took on PPI. The reason for that was that Barclays took no top-up for PPI in Q2,” one analyst said.
“Also, RBS has so far only taken a pretty nominal £50m hit on mis-selling interest rate derivatives. It would be no major surprise to see them, say, quadrupling that to circa £200m.”
After resilient US investment banking results recently, it is thought RBS’s scaled-back wholesale operation may have performed quite well, with stronger volumes expected in fixed income and currencies.
However, the group’s pain in the Irish mortgage market is expected to have continued in the latest three months to end-September.
One industry source said: “RBS has £19bn of residential mortgages in Ireland against which it has only taken £1bn in bad debt provisions so far. And 60 per cent of those are in negative equity.”
Investec has pencilled in a likely £800m Q3 pre-tax loss at Lloyds, near-40 per cent-owned by the taxpayer, against a £600m loss in the corresponding period in 2011. The broker forecasts underlying pre-tax profits at the group, which owns Scottish Widows and Bank of Scotland, of £700m – up £100m on a year ago.
Lloyds-watchers believe the bank could take a provision of about £150m for its Clerical Medical subsidiary mis-selling pensions and life policies, and a charge of about £80m to £100m for interest rate swap mis-selling.
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