Royal Bank of Scotland has agreed a multi-billion-dollar settlement for its role in the sale of risky mortgage products in the run-up to the financial crisis – but still faces the prospect of hefty fines from US authorities.
The taxpayer-backed banking giant struck the deal yesterday with the US Federal Housing Finance Agency (FHFA), seeing it resolve one of two major US inquiries into mis-selling allegations.
The Edinburgh-based lender said it had paid a “heavy price” for past mistakes as it agreed to pay $5.5 billion (£4.2bn) in total to the FHFA. Some $754 million will be repaid to RBS by other parties under an indemnification agreement.
However, City analysts warned that RBS faced an “elephant in the room” as it works towards a separate settlement with the US Department of Justice, which is expected later in the year.
Ross McEwan, chief executive of RBS, said the deal with the FHFA was “an important step forward in resolving one of the most significant legacy matters facing RBS”.
Alluding to the expansion undertaken by disgraced former boss Fred Goodwin, Mr McEwan added: “This settlement is a stark reminder of what happened to this bank before the financial crisis, and the heavy price paid for its pursuit of global ambitions.”
RBS said the net £3.65bn cost of the settlement with the FHFA would be largely covered by funds set aside. But it will take a $196m (£152m) charge in its second quarter results for the deal.
The bank had already put aside more than £6.5bn to cover US mis-selling claims.
The expected US settlements have weighed heavily on RBS amid fears over the size of the deals, with other banks having already forked out mammoth sums. It is one of the last lenders to settle with US regulators, following rivals such as Deutsche Bank, which agreed to pay $7.2bn.
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The US woes have been a major hurdle to the bank’s return to private hands, with the UK government having said the mis-selling claims need to be resolved before it can start to sell its shares in the lender, which is still more than 70 per cent owned by the taxpayer.
RBS finance chief Ewen Stevenson said the FHFA settlement was “in the region of what we’d been anticipating”.
But Mr McEwan cautioned that the bank may need to set aside more cash to settle outstanding claims, saying: “We have always been very open about the fact there could be further provisions.”
Laith Khalaf, senior analyst at financial services firm Hargreaves Lansdown, said: “Ten years on from the financial crisis, RBS and the UK taxpayer are still counting the cost of the bank’s former misdemeanours.
“The coming year isn’t going to be pretty for the bank, as it works through the costs of outstanding US litigation for mortgage-backed securities sold in the run-up to the credit crunch.
“The bank also has to resolve European competition issues, which required it to spin out a challenger bank as part of the terms of its state bailout.
“The elephant in the room is the US Department of Justice fine, which is likely to be sizeable, and is subject to a high degree of uncertainty.
“RBS has already braced itself for this and other costs by setting aside £3bn, but until the precise figure is known, shareholders are exposed to a potentially nasty surprise.”
Mr Khalaf added: “RBS shares are currently trading at around half the price the taxpayer needs to break even on the bailout, which means a return to private hands is still a long way off.”
RBS is among a number of lenders that have reached massive settlements in the US over the sale of mortgage-backed securities.
While these complex financial products were pitched as a safe bet to investors, they later unravelled when it became clear they were made up of low-grade mortgages from borrowers who were unlikely to repay their loans, triggering the so-called subprime crisis.
RBS was the biggest non-US bank issuer of residential mortgage-backed securities between 2005 and 2007.