RBS agrees £3.65bn settlement over risky US mortgages

Added 12th July 2017

The Royal Bank of Scotland has agreed to pay the Federal Housing Finance Agency (FHFA) $5.5bn (£4.2bn) to drop its outstanding litigation against the bank.

RBS agrees £3.65bn settlement over risky US mortgages

The litigation is in relation to RBS’s issuance and underwriting of approximately $32bn (£25bn) of residential mortgage-backed securities (RMBS) in the US prior to the financial crisis.

RBS said in a statement the net cost incurred will in fact be $4.75bn (£3.65bn) once it receives a reimbursement of $754m (£581m) under indemnification agreements with third parties.

The bank said it has already made provisions for most of this sum, but will recognise an incremental charge of $196m (£151m) in its results to be published on 4 August.

RBS said following this agreement, unresolved RMBS litigation matters involve the issuance of less than $1bn of RMBS issued primarily from 2005 to 2007.

A separate deal is expected with the US Department of Justice, and the bank has built up a war chest of around £3bn in anticipation of this.

According to its last annual report and accounts, RBS made an attributable loss of £7bn in 2016, mostly reflecting charges for outstanding litigation and conduct, and costs associated with restructuring of the bank. 

Ross McEwan, chief executive at RBS, said: “Today’s announcement is an important step forward in resolving one of the most significant legacy matters facing RBS and is further evidence of the determination of the bank’s leadership to put our remaining issues behind us.

“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.”

Laith Khalaf, senior analyst at Hargreaves Lansdown, said 10 years on from the financial crisis, RBS and the UK taxpayer are still counting the cost of the bank’s former misdemeanours.

He added the “elephant in the room” is the looming US Department of Justice fine, which is likely to be sizeable and subject to a high degree of uncertainty, exposing shareholders to a “potentially nasty surprise”.

Khalaf said: “The bank is still of course largely owned by the UK government. 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.”

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About Author

Sebastian joined Last Word Media in 2017 as editor of Portfolio Adviser. He previously spent 10 years as a journalist and editor in the UK institutional investment sector, most recently as editor of Portfolio Institutional. Prior to that, he held several roles at Professional Pensions which is part of Incisive Media.



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