Royal Bank of Scotland’s share price has risen over 3% today on news that the lender has reached a ‘tentative’ agreement on a settlement that would end the long running US probe into its activities in the run-up to the 2008 sub-prime mortgage meltdown.
Gains were as high as 5.5% in early trading today before paring as the session progressed. RBS is still majority owned by the UK-government, which bailed the bank out at the height of the financial crisis in 2008, but reaching a settlement with US authorities is likely to pave the way to that holding being sold back to the private sector. UK chancellor Philip Hammond committed to offloading a stake worth up to £3 billion by next year but has been reticent to do so before settlement was reached.
The uncertainty around how much the final cost would be to the bank has weighed on its share price, despite a return to financial health in recent times and the government understandably wishes to secure a reasonable return on the public purse’s forced investment. The provisional settlement with the Department of Justice, which is yet to be rubberstamped, is around $4.9 billion (£3.64). The figure is significantly below that expected by many analysts with Deutsche Bank having forecast $9 billion and Bloomberg Intelligence a whopping $11 billion. $3.46 billion of the settlement bill provisionally agreed upon has already been set aside by RBS and the bank said in a statement today that the remaining $1.44 billion will be deducted from Q2 earnings.
The DoJ probe into RBS is around its packaging and sale of the ‘sub-prime’ mortgage-backed securities that sparked the global financial rout, credit crisis and subsequent recession. RBS was one of many banks involved in the toxic securities trade, though is one of the last to reach settlement. Barclays reached an agreement to pay $2 billion in March, having refused to meet the $5 billion bill the DoJ wanted. This tough bargaining position likely contributed towards London-listed peer RBS managing to agree a final sum significantly below what had been anticipated.
The UK government could now sell a stake in the bank as soon as before summer with its share price now expected to rise over the intervening period. Markets should push the RBS share price back up towards its fundamentals now that uncertainty around the final expense is close to be being removed, which will also allow the reintroduction of dividend payments.
Once final settlement has been reached it can be expected that details will be published on what exactly the Department of Justice has been investigating the bank over. However, interest has been piqued as to the gory details by RBS chief executive Ross McEwan’s comment:
“Back in 2005 to 2007 there were some things done here that when they come out and are published, none of us will be comfortable reading them.”
Despite that likely embarrassment, today’s news should mean that the bank, the UK’s fourth largest by both market capitalisation and assets, can finally move forward from a less than positive moment in its history.