RBS pre-tax losses of £1.5bn in first half

“It is a pretty tough external environment, but I think we are making good progress.” Royal Bank of Scotland Chief Executive Stephen Hester said in a radio interview today after releasing first-half results.

RBS, 82 per cent owned by the UK taxpayer, is being investigated by the Financial Services Authority and its bankers face up to 10 years in prison if found to have criminally manipulated Libor, the benchmark borrowing rate.

But RBS was busy putting a positive spin on the numbers today. Operating profit of £1.8bn was broadly in line with the first half of 2011, despite the worsening economic backdrop and the restructuring of RBS’s markets business, the bank said in a statement.

The figures grabbing the headlines were the millions set aside for errors and problems, however.

RBS set aside £125m to compensate up to 13m customers for an IT problem in June that prevented some cusomters from accessing bank accounts for up to a month. Another £135m was set aside to compensate customers mis-sold payment protection insurance and RBS will spend up to £50m to cover claims from small businesses mis-sold specialist insurance called interest rate swaps.

Libor rigging

RBS, which has 30m customers worldwide, is the second large UK bank to admit Libor-rigging after Barclays. RBS said it has dismissed “a number” of employees for misconduct as a result, without citing exact figures. Investigators examining Libor – the interbank lending rate at which banks are willing to lend to each other – are ongoing worldwide and RBS is exposed to fines and lawsuits as regulators probe possible criminal activity.

Barclays paid a $453m fine for its role in the international scandal. Authorities are now looking at 20 banks worldwide suspected of trying to influence Libor.

In RBS’s case, however, it is taxpayers that are on the hook for most of the losses and fines – and there are plenty more to come. The group said it was not possible to measure the impact on the bank, the timing or the amount of fines or settlements.

Mr Hester has 18 months left of his clean up operation of a bank that made record £24bn losses in 2008, and he is widely expected to leave after that period.

FSA investigation

On top of the £1.5bn loss in the first half (compared to a loss of £794m loss last year) there are mounting frustrations within the government about RBS’s failure to lend to UK businesses, prompting senior government figures to discuss a possible £5bn buy-out of RBS private investors to fully nationalise the bank. The buy-out would give the government the 18 per cent of RBS it does not own, but Chancellor George Osborne is said to oppose the idea.

RBS maintains it is lending what it can to small businesses without taking excessive risks. The bank provided almost half of all new loans to small and medium enterprises last year.

“Regardless of ownership, RBS is trying to lend as much as we prudently can. We’re biggest (corporate) lender in UK,” Stephen Hester said in a statement today.

Fraud probe

The Serious Fraud Office has not said which banks it is investigating over the Libor rigging scandal, but it is highly likely major British lenders, including RBS, Barclays and Lloyds Banking Group. The FSA has also started investigating.

Mr Hester warned reporters and shareholders to expect a “huge” fine in an interview this week but he did not cite a figure. While any Libor fine may not be high enough to topple major banks, the once mighty instututions also face lawsuits related to Libor rigging.

For example, New York lender Berkshire Bank filed court papers against Barclays, JP Morgan, Citigroup and others claiming they engaged in the “unlawful suppression” of borrowing rates. Berkshire Bank, which has assets of $854m (£542m), wants to turn its case into a class-action which would allow other smaller lenders to join in.

Berkshire alleges it was cheated out of interest income because rates on loans tied to Libor were “artificially” depressed. The lawsuit argues that the alleged manipulation short-changed lenders by helping borrowers pay less for mortgages and other loans.

Britain’s government on Monday said urgent reform of the Libor rate is urgently required. It said a review will be conducted by Martin Wheatley, a top official at the FSA, and will look at how Libor is constructed and how to move to a new regime.

Losses among European banks

RBS has not been alone in its hand-wringing this week. Leading European banks reported dismal profits, blaming everything from Europe’s debt crisis and Spain’s property crash to Facebook’s disappointing stock market flotation. Within an hour on Tuesday, UBS of Switzerland, Germany’s Deutsche Bank, Spain’s BBVA and Austria’s Erste Bank delivered bad news.

Deutsche Bank said it would cut 1,900 jobs to cut 3bn euros in cost. UBS reported its second-quarter profit more than halved to 425m Swiss francs as its investment bank made a loss after trading, partially blaming Nasdaq’s mishandling of the Facebook flotation.

BBVA, Spain’s second biggest bank, said first-half profit fell by a third as it set aside cash to cover losses on its toxic real estate loans. Austria’s Erste Bank cut its 2012 profit outlook for the second time in three months in the face of deteriorating economies across Europe.