RBS puts aside £400m for rate-rigging investigation

31st October 2014

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Royal Bank of Scotland has set aside £400 million to cover the costs and potential fines arising from the investigation in Libor rate-rigging.

The 81% taxpayer-owned bank announced it had put the money aside in its third quarter results, a day after Barclays said it had ring-fenced £500 million to cover the cost of the Libor investigation. It also put aside an extra £100 million to cover payment protection insurance mis-selling.

Pre-tax profit at RBS was £1.27 billion in the third quarter, an increase of £260 million on the previous quarter and a large increase on the £634 million loss experienced in the same period last year.

RBS chief executive Ross McEwan said that while the bank would retain control of Ulster Bank, it was ‘inevitable’ there would be RBS branch closures. In June he bank said 100 of its 1,900 would close.

He was also upbeat about plans to make RBS simpler and fairer, he said: ‘But we know we still have a long list of conduct and litigation issues to deal with and much, much more to do to restore our customers’ trust in us.’

Market analysts were pleased with the update from RBS. Jefferies analyst Joseph Dickerson recommended a ‘buy’ on the shares and a target price of 500p.

‘RBS Q3 results showed all elements of the profit and loss as well as capital beat estimates, despite a £780 million litigation and conduct charge,’ he said.

‘Underlying profit before tax was 12% ahead driven by: 1% better revenues, 3% better costs, 14% better impairments. Set-up for going concern business is quite strong with net interest margin expansion and loan growth in UK retail. We expect upgrades to consensus.’

What is Libor and what went wrong?

RBS is just one of a number of banks being investigated for Libor rate-rigging, which is a very serious problem.

Banks borrow money from each other on a daily basis to plug holes in their balance sheets and the rate at which they lend to one another is the Libor – the London Intra-Bank Offered Rate.

There have been two major issues. The first is that individual traders in banks influenced the bank’s interest rate submissions in order to make a profit for themselves and second, and more worrying, some banks doctored their Libor submissions to make their balance sheets look stronger – Barclays was found to have done this.

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