SHARES in Royal Bank of Scotland received a boost amid growing hopes the fine to be imposed on the state-owned lender for mis-selling US mortgage-backed securities will not be as high as initially feared.
Investors sent shares in the Edinburgh-based institution up more than two per cent after the bank revealed it set aside a further £3.1 billion ($3.8bn) to cover the expected fine for its role in the scandal as talks with the Department of Justice (DoJ) continue. Royal Bank has now made provisions of £6.7bn in anticipation of a hefty fine from the DoJ, now believed to be imminent after Deutsche Bank and Credit Suisse settled their cases before Christmas.
Deutsche eventually agreed to pay $7.2bn to settle the mis-selling claims against it, having initially been hit with a $14bn fine by the DoJ in September. Taken alongside the latest guidance from Royal Bank on costs, there are hopes the fine ultimately served on the Scottish institution may not be as severe as previously forecast. Previous estimates for the fine have varied between $9bn and $12bn.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said the update from Royal Bank had brought a positive response from the market because it has “put a number” on the mis-selling fine for investors. However he flagged that the “cost of litigation may well come in ahead of what RBS has so far put aside”, adding the eventual fine will also be inflated by the 15 per cent fall in the pound versus the US dollar since the Brexit vote.
Mr Khalaf said: “Everybody knew it was coming. It is very easy in the absence of any information to fear the worst. Now that there is more information, it is more tangible and there is a number to hang on to. That has given investors the confidence to buy shares in the expectation that what RBS is putting aside is the best estimate to date of what it is going to cost.”
Asked how significant it will be for the RBS leadership to settle the claims in the US, Mr Khalaf said it would be a “big burden off their shoulders”. “There is still Williams & Glyn [to divest], there is still ongoing restructuring, but in terms of big bang costs, this is the one that is front and centre,” he said. “It will be a big relief for Ross McEwan and the board to get this particular settlement in the rear view mirror.”
Mr Khalaf warned, though, that the additional provisions “will take a toll in the bank’s balance sheet”. The bank itself said the extra provision would reduce its CET1 (core equity tier one) capital ratio by 135 basis points to 13.6 per cent.
Labour MP John Mann was less sanguine, and called for the lender to be broken up. He said: “This latest admission of failure is just another sign that RBS in its current form just isn’t fit for purpose.”
Royal Bank said talks with the US DoJ are ongoing, and stated that the outcome of the investigations remains uncertain. Chief executive Ross McEwan said: “Putting our legacy litigation issues behind us, including those relating to RMBS (residential mortgage-backed securities), remains a key part of our strategy. It is our priority to seek the best outcome for our shareholders, customers and employees.”
Shares in Royal Bank closed up 5.4p at 232.9p.
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