RBS up as it agrees to pay US$4.9bn to resolve US DoJ probe into sale of mortgage-backed securities

Royal Bank of Scotland Group PLC (RBS.L) said after the close on Wednesday that it has agreed to pay US$4.9bn to resolve a US Department of Justice probe into the sale of mortgage-backed securities ahead of the 2008 financial crisis.

In a statement, the FTSE 100-listed lender – which was rescued by the UK taxpayer after the 2008 crisis – said that US$3.46 bn of the proposed civil settlement will be covered by existing provisions and it will take a US$1.44bn incremental charge in 2018’s second quarter to cover the rest.

READ: RBS to close 162 branches as part of Williams & Glyn cull

The accord would resolve a major issue that has weighed on the company’s share price and complicated the UK government’s plan to sell down its more than 70 percent stake in the bank.

RBS’s chief executive Ross McEwan said the agreement “is a milestone moment for the bank.”

He added: “Reaching this settlement in principle with the US Department of Justice will, when finalised, allow us to deal with this significant remaining legacy issue and is the price we have to pay for the global ambitions pursued by this bank before the crisis.

“Removing the uncertainty over the scale of this settlement means that the investment case for this bank is much clearer.”

No assurance on final terms

RBS said the proposed settlement is subject to the bank and the DoJ entering into a legally-binding agreement and added that “there can be no assurance that the parties will agree on the final terms of any proposed settlement.”

The DoJ has previously settled with other banks Barclays, Citigroup, Deutsche Bank, JPMorgan Chase, Credit Suisse, Morgan Stanley, Goldman Sachs, and Bank of America.

RBS previously agreed in July 2017 to pay US$5.5bn to resolve a lawsuit by the Federal Housing Finance Agency, the conservator for Fannie Mae and Freddie Mac, claiming it misled the US mortgage giants into buying mortgage-backed securities.

In early trading, RBS shares were up 4.8% at 289.4p.

Investors seem happy

Neil Wilson, chief market analyst at Markets.com commented: “It’s a happy day for RBS, with the DoJ settlement coming in well below what we had feared.

“Of the $4.9bn fine, around $3.5bn has already been provided for so the impact on future earnings appears to be at the very low end of expectations. The settlement could easily have been twice as much.”

He added: This removes the last great barrier to the government selling off its stake and we would envisage that the chancellor will expedite the disposal of its 71% shareholding.

“The settlement also paves the way for a quick return to annual profits after ten years of losses and dividends will once again start flowing.”

 – Adds share price, analyst comment –

Story by ProactiveInvestors