Fines and litigation costs have been a thorn in the side of Royal Bank of Scotland (LSE: RBS), Lloyds (LSE: LLOY), Barclays (LSE: BARC) and HSBC (LSE: HSBA) ever since the end of the financial crisis.
Indeed, since 2009 US and European banks have been forced to foot the bill for over $230bn in fines and legal costs.
However, analysts at Morgan Stanley now believe that these banking giants are facing yet another wave of new litigation costs, which could amount to more than $50bn. What’s more, Morgan’s analysts believe that other European banks are facing an additional $70bn during the next two years
These fines relate to alleged manipulation of benchmark interest rates, manipulation of foreign exchange markets, mis-selling of mortgages and mis-selling of payment protection insurance.
Broken down, it’s believed that RBS will have to payout an additional $10.6bn in fines, on top of the $12.6bn already paid or provisioned for. Barclays is in line for additional fines of $8.3bn, HSBC $7.7bn and Lloyds could be on the hook for a further $6.1bn.
Lacking capital
For Lloyds and RBS in particular, these fines are concerning. The two banks are struggling to bolster their capital ratios and further fines will restrict their ability to bolster their capital cushions.
Lloyds is in an especially dangerous position, as the bank is trying to receive permission to restart dividend payments from the Prudential Regulation Authority. Additional fines, and the use of reserves to pay litigation costs could restrict the bank’s ability to restart payments.
Lloyds and RBS only just passed the Bank of England’s latest set of stress tests thanks to last-minute plans to strengthen their balance sheets.
If the two banks are forced to pay out billions in additional fines and legal costs, their ability to grow earnings and in Lloyds’ case, reintroduce a dividend payout, is going to be severely reduced.
Dividend jeopardy
Barclays and HSBC are facing similar pressures, although these two banks are better positioned than their smaller peers. For example, both HSBC and Barclays sailed through the BoE’s stress tests at the end of last year and both banks have been working hard to bolster capital ratios in recent years.
However, these fines could restrict HSBC’s and Barclays’ ability to pay, and increase their dividends payouts. This is exactly what Neil Woodford warned of when he sold his holding in HSBC last year citing ‘fine inflation’.
