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LONDON (Reuters) - State-backed Royal Bank of Scotland (RBS.L) has set aside 400 million pounds ($640 million) to cover potential fines for manipulating currency markets and warned further charges for past misconduct would continue to hit its profits.
RBS, 80 percent-owned by the British government following a 45 billion pound bailout during the financial crisis of 2007 to 2009, on Friday joined other big rivals in signaling it is close to agreeing settlements over alleged manipulation of the $5.3 trillion-a-day foreign exchange market.
The forex manipulation, revealed after banks were already under scrutiny for profiteering in the setting of benchmark lending rates such as Libor, relates to daily fixing rates which traders are alleged to have manipulated to suit their own market positions.
RBS also faces a number of other probes relating to past misdeeds which threaten to undermine its turnaround under Chief Executive Ross McEwan, who has steered the bank back into profit this year after it made a loss of 8.2 billion pounds in 2013.
"We are actively managing down a slate of significant legacy issues. This includes significant conduct and litigation issues that will continue to hit our profits in the quarters ahead," McEwan told reporters on Friday.
RBS is being investigated by regulators looking into its selling of bonds backed by residential mortgages in the United States and its treatment of struggling small British firms. The bank is also expected to be fined by British financial regulators for an IT failure two years ago which left customers without access to their bank accounts.
In addition, RBS faces a mounting bill to compensate customers mis-sold loan insurance. It set aside another 100 million pounds to deal with the matter on Friday, taking its total bill to 3.3 billion pounds.
RBS is one of six banks in talks with UK regulators on a deal that would involve them paying about 1.5 billion pounds in a group settlement in relation to alleged forex manipulation, sources have said. They said a deal could come in mid-November and U.S. regulators were also working on a group settlement.
McEwan said RBS would not pay a dividend until it has more clarity over future misconduct charges and has substantially strengthened its capital position, potentially making it more difficult for the government to start selling its shares.
"I don't think we should be thinking about dividends until we've got a really good capital build and seen some of the bumps in the road out of the way," he said.
RBS increased its core Tier 1 capital ratio by 70 basis points to 10.8 percent during the third quarter and its leverage ratio improved by 20 basis points to 3.9 percent. The bank has set a target of holding core Tier 1 capital of more than 12 percent by the end of 2016.
"There's no way we will be paying a dividend until we get ourselves well in advance of that 12 percent target," McEwan said.
Britain's financial regulator expects banks to hold an absolute minimum of 7 percent core capital. However, investors generally expect a ratio of at least 10 percent.
The Bank of England is expected to impose a tougher leverage ratio than the current 3 percent requirement on UK banks later on Friday. It is expected to require banks to hold between 4 and 5 percent, meaning they can lend between 20 and 25 pounds for each pound of capital held in reserve.
RBS said it made a third-quarter pretax profit of 1.3 billion pounds, compared with a loss of 634 million the year before. That was ahead of an average analyst forecast of 1.1 billion compiled by the bank.
An economic revival in Britain and Ireland has enabled RBS to recover debts it had written off. The bank had a net release of previously written-off loans of 801 million pounds during the quarter, ahead of an average forecast of 590 million.
RBS's corporate and institutional banking arm slumped to a loss of 557 million pounds, compared with an 18 million loss a year ago. That reflected charges of 562 million pounds for misconduct, including 400 million for forex fines.
The division, which is being shrunk and focusing on less risky areas, also had significantly lower income, RBS said.
Shares in RBS, which have risen by more than a quarter in the past six months, were up 4.3 percent at 7.45 a.m. EDT. They rose as high as 381.6 pence, their highest in 12 months.
"The build in capital is strong notwithstanding substantial conduct and restructuring provisions," said Deutsche Bank analyst Jason Napier.
RBS said it had decided to keep Ulster Bank, having carried out a review of the business which could have resulted in it being sold off. McEwan said the unit could deliver attractive shareholders returns in future.
Like other British banks, RBS is closing branches in response to customers choosing to bank online instead. It has seen a 30 percent drop in branch transactions since 2010.
McEwan said RBS had already closed 102 branches this year and expects 154 to have shut by the end of 2014, the equivalent of 5 percent of its network.
Editing by David Holmes and Pravin Char