RBS fine shows banks are still in hot water

Royal Bank of Scotland (RBS) is likely to pay a fine that will run into several hundred million pounds paid for its Libor transgressions, according to BBC business editor Robert Peston.

The fine is likely to be higher than the £290 million in fines paid by Barclays (BARC), but less than the £940 million paid by UBS.

"RBS is braced for substantial humiliation as and when the announcement is finally made," Peston said, adding: "The market manipulation continued well into 2010, or long after RBS's management was replaced at the end of 2008 following the collapse of the bank and its partial nationalisation.

"RBS's board did not become aware of it till notified by regulators, in 2011."

There is also likely to be a senior resignation, although Peston did not believe chief executive Stephen Hester was in trouble.

It is also understood that the Financial Services Authority (FSA) is demanding some bonuses awarded to executives and investment bankers to be repaid or clawed back. But Peston declared that this could only happen in relation to bonuses that were deferred: "At risk are those who were promised bonuses in 2009 and 2010, but haven't yet received all their entitlement."

Outlook for the banking sector in 2013

The news acts as a reminder that banks are not out of hot water yet.

Banks have rallied sharply since last September: Barclays, Lloyds Banking Group (LLOY) and RBS have all nearly doubled in price, driven by additional liquidity from central banks and the easing of some Basel 3 requirements by regulators.

At the same time, things are not as rosy as the share prices seem to suggest. Macro forecasts have been revised downwards, with the Bank of England cutting its GDP growth forecast for 2013 from around 2% to c. 1%.

While these overall macro downgrades lead to expectations of earnings forecast downgrades for the market in general, investors should be asking what this means for bad debts, and whether the banks have set aside adequate provisions.

Analysts believe that RBS and Lloyds would be the most exposed to another macro downturn in terms of potential impairments, while Barclays, HSBC (HSBA) and Standard Chartered (STAN) would fare better.

RBS due "sharp correction"

Ian Gordon, analyst at Investec, is forecasting the Libor fines to be in the region of £400 million, but stressed that this "pales into insignificance" when compared with the payment protection insurance (PPI) for which RBS has already provided £1.7 billion.

With shares having soared 85% over the past year, Gordon believes the stock is due a "sharp correction".

He was forecasting an attributable loss of £1.4 billion for the fourth quarter underpinned by regulatory costs, increased restructuring costs, flat non-core losses and an elevated tax charge.

Should investors sell Lloyds?

Lloyds does have some positives. In the third quarter, group impairments fell £0.2 billion quarter-on-quarter to £1.3 billion, while net interest margins improved by two basis points quarter-on-quarter to 1.93%.

However, the PPI saga is continuing: Lloyds has so far taken provisions of £5.3 billion, over half the £10.2 billion accrued by the "big four", with much more to come.

Additionally, it has not yet taken any charges for interest rate swap mis-selling or Libor-related issues.

"With a weak outlook for earnings and returns, our recommendation is 'sell'," said Gordon. "We recognise (reduced) 'tail risks' around credit risk concentration, conduct and capital, but with a degree of ongoing regulatory largesse, these issues should, we believe, prove to be adequately contained."

HSBC: "Limited upside"

HSBC has gained about a third of its market capitalisation over the past year, as many investors deemed it a safe investment.

Gordon revealed he was modestly positive on the bank's Ping An disposal; relatively ambivalent on its lapsed RBS India acquisition; and encouraged that legacy asset disposals appear imminent in the US.

Still he believes HSBC has "too much capital", explaining: "Until investors can see how and when the 'freed-up capital' can be deployed or returned, further upside appears much more limited."

Gordon had a 'hold' recommendation on the stock

Analyst backs Barclays

Despite gaining more than 50% over the past year, Barclays is trading on a price to net asset value ratio of about 0.7 times, in line with loss-making RBS and at a discount to Lloyds on 0.9 times.

The past year has seen the financial giant encounter one obstacle after another, from the Libor scandal and resignation of ex-chief executive bob Diamond, to FSA and Serious Fraud Office investigations into Barclays, relating to fees paid to sovereign wealth fund Qatari Holdings during 2008's emergency rights issues.

2013 is thus expected to be a year where new chief executive Anthony Jenkins tries to pacify not only shareholders, who are fed up after years of paltry returns, but also the British public, for whom banker bashing and moaning about the bonus culture have become a national sport.

The stakeholders won't have to wait much longer. Jenkins is due to go public with his proposals for a turnaround for the bank on 12 February.

Barclays was Gordon's preferred pick: "We see a clear disconnect between sell-side consensus and the perceived 'new reality'," he stated.

However, he cautioned: "While recent operational performance has met or exceeded market expectations, and we certainly make no downgrade to our own underlying earnings forecasts, wider obstacles to further progress remain."

Standard Chartered: Firing on all cylinders

It appears Standard Chartered can do no wrong.

It has remained on course to post a 10th year of record income and profits in 2012, with Gordon forecasting revenues growing at between 10% and 11% per annum between 2013 and 2015. He is also predicting the return on equity to grow from 12.7% in 2013 to 13.3% by 2015. Dividend per share is also expected to rise 10% per annum, reaching a prospective yield of approximately 4% by 2015.

The bank remains well capitalised, with a core tier 1 ratio of 11.6% at 30 June 2012, and it has a growing balance sheet to utilise its capital generation.

Despite this, the stock is trading on a 2016 price/earnings ratio of about eight times.

"Looking forward, we continue to expect delivery of rapid, wholesale-led revenue growth alongside positive jaws and inconsequential impairments," commented Gordon.

"In an uncertain world, Standard Chartered offers strategic clarity, consistency, opportunity and value. It is our top pick from here."