Royal Bank of Scotland has agreed a $4.9bn (£3.6bn) penalty with the US Department of Justice to end an investigation into sales of financial products in the run-up to the financial crisis, clearing the way for the UK government to sell its 71% stake in the bank.
The RBS chief executive, Ross McEwan, said the agreement in principle was a milestone moment for the bank. The penalty relates to the sale of financial products linked to risky mortgages in the US between 2005 and 2007.
The chancellor, Philip Hammond, welcomed the agreement, saying it would help pave the way to a sale of taxpayer-owned shares.
The government could start selling down its stake this year, well before the March 2019 deadline. It plans to sell £15bn of shares, or two-thirds of its stake, in £3bn tranches by 2022-23. The taxpayer is sitting on a loss of about £26bn after the £45.8bn bailout of RBS during the financial crisis.
McEwan said the DOJ settlement served as “a stark reminder of past behaviours of this bank that we should never forget.” It was “the price we have to pay for the global ambitions pursued by this bank before the crisis.,” he said.
“Our current shareholders will be very pleased this deal is done. It does help the government sell a cleaner bank.”
RBS shares rose 5.5% in early trading and later traded nearly 3% higher at 284.2p.
The prospect of a large penalty had been hanging over RBS for years, making its shares hard to value. The settlement is smaller than expected. Two years ago, the body which controls the taxpayer stake said the bank could face a penalty of more than $12bn.
RBS is also expected to resume dividend payouts to shareholders after ditching them a decade ago.
Justin Cooper, chief executive of the share registry firm Link Market Services, said: “RBS’s settlement with US regulators, coupled with sharply improving profitability paves the way for the long-awaited restoration of its dividend. At first the dividend is likely to be a fraction of the £770m paid in 2007, but it will be a hugely significant milestone on the road to the bank’s eventual return to the private sector.”
RBS reported its first annual profit in a decade in February, £752m for 2017, following a £7bn loss in 2016. The penalty will take a slice out of the group’s 2018 profits, but it has already set aside $3.46bn and will only take a $1.44bn charge in the second quarter.
Gary Greenwood, a Shore Capital analyst, said: “This represents an excellent outcome for the group which should now open the door for the group to pass the Bank of England’s stress testing exercise.”
He expects RBS to pay a dividend of 7.3p this year, and said there could be share buybacks to reduce the government’s stake.
The final agreement may take several weeks to negotiate with the DOJ, the bank said.
RBS’s UK rival Barclays recently struck a $2bn settlement with the DOJ. RBS’s finance chief, Ewen Stevenson, said the bank had been a much larger seller of residential mortgage-backed securities in the US than Barclays. It shut that business three years ago. Deutsche Bank ended up with a $7.2bn penalty, the single largest settlement over the issue.
The DOJ penalty comes after RBS’s $5.5bn settlement with the Federal Housing Finance Agency last year, and its $500m settlement with New York state last month. This leaves a handful of small litigation cases, Stevenson said, adding the issue had been a heavy burden resulting in more than $10bn in settlement costs.
