Royal Bank of Scotland said yesterday evening that it has set aside more than £3 billion sterling for litigation and compensation claims in the UK and in the US.
The total includes £1.9 billion to cover largely US action over mortgage-backed financial products, RBS said in a surprise statement that sent its shares sliding. The bank owns Ulster Bank here.
The bank added it has made another £465m provision for compensation for the mis-selling of payment protection insurance (PPI), which covered repayments on credit products such as consumer loans or mortgages in Britain.
The UK lender said it would take another £500m provision over the mis-selling of interest rate hedging products, known as swaps, to small businesses in Britain.
There will also be an extra £200m for "various conduct related and legal expenses" when the bank publishes its fourth-quarter results next month.
Royal Bank of Scotland made the shock statement ahead of the stock market close yesterday, sending its share price sliding 2.2% on London's FTSE 100 index. However, its shares recovered in opening trade this morning.
RBS remains 81% owned by the UK government, after it was rescued with £45.5 billion of UK taxpayers' cash at the height of the 2008 global financial crisis, making it the world's biggest-ever banking bailout.
Chief executive Ross McEwan noted yesterday that before the crisis began RBS was the biggest bank in the world.
"When the crisis broke, the bank was involved in a number of different businesses in multiple countries that have subsequently faced heavy scrutiny by customers and regulators," he said.
"The scale of the bad decisions during that period means that some problems are still just emerging. The good news is we are now a much stronger bank and can manage these costs while still supporting our customers," he added.
The group said the extra £1.9 billion for mortgage-backed securities was announced "following recent third party litigation settlements and regulatory decisions".
An analyst for asset management group Investec warned that there may be further bad news to come.
RBS also revealed that its PPI compensation claims had continued at the same rate, rather than an expected decline, and were anticipated to continue for a longer time than previously thought.
The group's total provision for PPI compensation now stands at £3.1 billion, of which £2.2 billion had been used up by the end of last year.
Last November, meanwhile, RBS announced plans to create an internal "bad bank" to run down £38 billion of high-risk assets as the British government looks to return the rescued lender to the private sector.
New Zealander McEwan, who was formerly RBS head of retail business, was appointed as chief executive last August and took charge in October.