The Royal Bank of Scotland (RBS) has announced a £2.5bn hit on its profits, thanks largely to a £1.5bn provision for claims in the US relating to mortgage-backed securities.
The bank's share price was down 3.72 per cent to 251.2p just after markets opened this morning – its lowest since 2012. The bank will make a loss in 2015: it has not reported annual profit for seven years.
The £1.5bn takes RBS' total provision for litigation claims and charges relating to residential mortgage-backed securities (RMBS), which were effectively bad debts dating back to the financial crisis, in the US to £3.8bn.
The bank is setting aside £500m to deal with Payment Protection Insurance (PPI) claims and payments. This brings RBS' total bill for mis-selling PPI to £4.3bn.
Many banks have braced themselves for a spike in PPI payouts before the deadline to claim in 2018.
RBS also announced a write-down for its private banking division, Coutts, which will report a £498m drop in profits in the fourth quarter of 2015, or "goodwill impairment charge."
RBS is making a £4.2bn payment to shore up its pension scheme after changes to accounting rules: it won't affect annual results for the next financial year, but will be seen as a £3.3bn liability on its books and reduce its capital ratios by 0.7 per cent.
Overall, the moves will reduce the bank's capital ratio by 1.6 per cent, and net asset value by 30p a share.
RBS chief executive Ross McEwan said:
I am determined to put the issues of the past behind us and make sure RBS is a stronger, safer bank. We will now continue to move further and faster in 2016 to clean-up the bank and improve our core businesses.
We've always been open about the scale of past issues facing RBS and although there is clearly much more to do, this announcement is a further step towards addressing legacy issues and building a great bank for our customers and delivering long term value for our shareholders.
There are currently more than 20 civil lawsuits outstanding against RBS in the US relating to $43bn of toxic mortgage-backed loans. No provisions have yet been made for the criminal investigations against the bank by the US Department of Justice and several State Attorneys General.
The bank announced in 2013 its pensions scheme, which has 220,000 members, had a had an actuarial deficit of £5.6bn, meaning it might not be able to meet future obligations. That prompted the bank to agree annual contributions of £650m from 2014-2016 and £450m from 2017-2023, in addition to the regular £270m annual payments. The £4.2bn payment will largely settle the outstanding deficit, leaving £300m outstanding.
This comes a month before the bank announces its full year 2015 results on 26 February.