Banks face cost of Libor rigging

London: Britain’s biggest banks are under pressure to tell investors how much they expect the Libor rigging-scandal will cost shareholders when they start to report first-half earnings this week.

Barclays Plc was fined a record £290 million (Dh1.65 billion) last month for manipulating the benchmark London interbank offered rate. Civil lawsuits may cost the bank a further 626 million pounds, according to Morgan Stanley analyst Betsy Graseck. Royal Bank of Scotland Group Plc, Lloyds Banking Group Plc and HSBC Holdings Plc may pay as much as 2.2 billion pounds in fines and legal costs, Graseck said in a July 12 note.

Libor is the fourth scandal to hit the UK industry in the past 14 months that may erode earnings. The country’s biggest banks by assets have already set aside £6.9 billion to compensate customers improperly sold insurance. They are also under investigation for mis-selling interest-rate swaps to small businesses. Separately, HSBC may be fined for failures in money- laundering controls that US Senators say gave terrorists and drug cartels access to the country’s financial system.

Barclays has tumbled 22 per cent since the June 27 fine, erasing 3.4 billion pounds of market value. RBS slid 16 per cent, HSBC 11 percent and Lloyds 8 per cent in the period.

RBS, Lloyds, HSBC and Barclays are likely to resist calls to estimate the costs of litigation and fines because the cases are pending, according to four people with knowledge of the banks’ thinking who asked not to be identified. Banks only have to make a provision if the amount can be “estimated reliably,” according to the International Financial Reporting Standards used by UK firms. Officials at the banks declined to comment.

“They’ll say it’s a contingency, the amounts are unknown, therefore we can’t deal with anything with certainty,” said Prem Sikka, an accounting professor at the University of Essex, England. “I would say they should provision,” he said. “They know it’s coming.”

The Libor probe may overshadow an increase in profit before one-time items at Barclays, Lloyds and HSBC as provisions for bad loans ebb and costs decline. By contrast Wall Street’s five biggest banks, including JP Morgan Chase & Co. and Goldman Sachs Group Inc., posted the lowest first-half revenue since 2008 in the first half of 2012 as trading and deal-making dried up.

RBS, Lloyds and HSBC may each be fined about 420 million pounds by regulators, Morgan Stanley’s Graseck said. RBS may have to pay a further 680 million pounds to settle civil lawsuits, HSBC 224 million pounds and Lloyds about 38 million pounds, according to Graseck.

Following the fine and criticism from UK regulators, Barclays Chief Executive Officer Robert Diamond, Chairman Marcus Agius and Chief Operating Officer Jerry Del Missier all stepped down. The London-based lender is slated to report earnings at 7 a.m. on July 27.

Investors will be focusing on how the search for a replacement for Diamond is progressing and for any details on whether his departure may trigger a separation of Barclays’s investment banking unit from its consumer operations, according to Morgan Stanley analyst Chris Manners.

‘Clear the Decks’

Still, “Barclays may take some sort of hit to clear the decks ahead of a new CEO coming in,” said Alan Beaney, who helps manage £200 million, including Barclays shares, at RC Brown Investment Management Plc in Bristol, England.

The lender may say pretax profit increased to £4.1 billion for the first half from £3.7 billion in the year- earlier period, according to the median estimate of five analysts surveyed by Bloomberg. The estimates exclude the costs of the Libor settlement, debt-valuation adjustment, gains or losses on acquisitions and other one-time items.

A reduction in provisions for bad loans and cost cuts at the bank’s consumer unit will help to compensate for shrinking income from the securities unit, Gary Greenwood, an analyst at Shore Capital in Liverpool, wrote in a July 23 note to clients.

Lloyds reports

Barclays’s investment banking unit’s net income before debt valuation adjustments may drop to 5.95 billion pounds from £6.37 billion in the year-earlier period, Morgan Stanley’s Manners wrote in a note to clients on July 23.

Lloyds may say pretax profit climbed to £1.4 billion from £1.1 billion in the first half of 2011, according to five analysts surveyed by Bloomberg. The London-based lender is slated to report results at 7 a.m. on July 26.

Impairments for bad loans will fall by almost £2 billion, estimated Ian Gordon, an analyst at Investec Plc in London. Even so, net interest margin, the difference between what the lender earns on loans and its cost of funding, is being squeezed, Credit Suisse Group AG analysts led by London-based Carla Antunes da Silva wrote in a note to clients on July 23.

Net interest margin may fall to 1.93 percent by the end of the first half, from 2.07 per cent at the end of June last year, Antunes da Silva said. Lloyds CEO Antonio Horta-Osorio said in May the margin will narrow to less than 2 per cent in 2012.

Branch sale

Lloyds agreed last week to sell 632 branches to Co- Operative Bank Plc for as much as £750 million to comply with the terms of its 2008 government bailout. Lloyds may post a loss of as much as 1.15 billion pounds on the sale after agreeing to provide capital to Co-Op to complete the deal. Credit Suisses’s Antunes da Silva said she’s seeking details on how the sale will affect earnings.

Lloyds and its competitors may also have to increase the amount they have set aside to compensate clients who were mis- sold payment protection insurance. HSBC has already made a 770 million-pound provision, Barclays £1.3 billion pounds, RBS £1.2 billion and Lloyds £3.6 billion. Lloyds may have to set aside a further 300 million as more customers seek redress, Manners said.

HSBC, which generates most of its earnings in Asia, may say profit rose to $12.95 billion for the first six months, up from $11.47 billion in the first half of 2011, according to five analysts. RBS, the recipient of the biggest banking bailout in the world, may say next week first-half pretax profit slipped to £1.85 billion from 1.87 billion pounds in the year-earlier period, according to three analysts surveyed by Bloomberg. HSBC reports results on July 30 and Edinburgh-based RBS on August 3.

‘Underwhelming picture’

All lenders are facing a squeeze on profitability after the UK economy slid into its first double-dip recession since the 1970s in the first quarter. Lloyds, Barclays and RBS have all scrapped or delayed their profitability targets this year.

Lloyds’s Horta-Osorio said on February 24 the lender won’t meet the target it set last year of boosting its return on equity to between 12.5 percent and 14.5 per cent by the end of 2014. The bank had a 6.2 per cent loss on equity for 2011. Diamond said on Feb. 10 that Barclays may fail to hit the 13 per cent target for ROE by 2013 after it fell to what he called an “unacceptable” 6.6 per cent in 2011. RBS lowered its medium-term ROE target to 12 per cent from 15 per cent on February 23.

“With limited scope for negative surprise on impairments and with a predictable weak outlook for revenues, expect a broadly underwhelming picture,” Gordon said.