RBS Likely to Take a Hit in PPI Battle

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The Royal Bank of Scotland ( RBS ) Group ( RBS ) may have to set aside as much as £1 billion ($1.6 billion) to compensate customers who were mis-sold Payment Protection Insurance (PPI) policies over the years. The 'PPI scandal' which was brought to light way back in 1998, finally reached a conclusion in April 2011 when the British high court decided in favor of the Financial Services Authority (FSA). The ruling went against major UK-based banks which includes RBS' competitors Barclays ( BCS ), Lloyds ( LYG ) and HSBC ( HBC ). The RBS Group also competes with other worldwide banking institutions and financial services group like Citigroup ( C ), Bank of America (BAC), UBS (UBS) and JPMorgan Chase (JPM).

Our price estimate for RBS stock stands at $13.43 , roughly in line with market price.

The decision hits RBS at its 'core'…

RBS has been in the process of restructuring since its £45 billion bailout by the government during the global financial crisis of 2008. The group has been working hard to reduce the value of its non-core assets from the £258 billion high at the end of 2008 to less than £40 billion by 2013.

And all the effort has indeed been profitable with the core-banking division registering a stable and more sustainable revenue mix.  The core bank made an operating profit of £7.4 billion ($11.5 billion) in 2010. The company, already reeling under the effect of the £1.3 billion ($2.1 billion) set aside for bad debts at Ulster Bank in the first quarter of 2011, may see the PPI settlement may take away another £1 billion ($1.6 billion) from the bottom-line.

… and could wipe off  significant value for the company

The effect of the PPI settlement on RBS' value is illustrated through the interactive chart above that showcases impairment loss estimates for the group's UK retail division.

While the exact amount that may need to be compensated is hard to calculate, given the retrospective nature of the payments that need to be made to customers, we believe that impairments could more than double from our current estimates through 2013. This scenario would represent 5% downside to our $13.43 prices estimate for RBS.

See our complete analysis for RBS stock here



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: BCS , C , HBC , LYG , RBS

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