Taxpayer-owned Royal Bank of Scotland (LON:RBS) has agreed a deal to settle the claims of the majority of shareholders who had alleged they were misled when they took part in the bank's £12bn cash call in 2008.
The bank said it has reached a full and final settlement with three of the five groups of investors – representing 77% of the claims by value - who were pursuing lawsuits against it over the ill-fated rights issue in 2008.
RBS is now trying to reach an agreement with the other two groups in order to avoid the case coming to trial in March 2017.
The bank said it was willing to make available a sum of up to £800m to be split across all five shareholder groups to bring an end to the legal action.
RBS raised £12bln in April 2008 but six months later it had to be rescued in a £45.5bln government bailout following the financial crash and has failed to post an annual profit since.
The shares issued in the rights issue have lost around 90% of their value.
Richard Hunter, head of research at Wilson King, said: “I suspect that the reaction of RBS in making this settlement has an element of putting legacy issues to bed, as opposed to continuing to fight the shareholder group action.
“To have made a settlement at all when the shareholder groups were alleging that they had been misled in taking up at the rights issue is unusual, but seems to vindicate that RBS had indeed overstretched at the time with its capital spending, most notably the ABN AMRO acquisition.
By mid morning, having edged lower initially, RBS shares rallied 1.7%, or 3.2p higher to 196.6p as the banking sector recovered early falls.
Hunter added: “The share price reaction has been muted, with the sector in general benefiting from the bounce back of the Italian banks following an initial sharp markdown of prices following the weekend’s political events.”
Banks were under pressure amid fears for the survival of their Italian counterparts after Italy voted heavily against a crucial referendum on constitutional change, leading to the prime minister, Matteo Renzi’s resignation.
But they soon turned around as the melt-down in the Italian financial sector failed to materialise, reassured by expectations the European Central Bank would step in to rescue them if needed.
Barclays was the top FTSE 100 gainer by mid morning, up 2.5% or 5.25p at 218.2p.
Joshua Mahony, Market Analyst at IG, said: ‘Fears over the future for Italian banks will persist, with recapitalisation plans thrown into doubt after Renzi’s exit. However, this morning’s recovery is a clear sign that market perception is that despite causing uncertainty, this result is unlikely to spark a major crisis for the banks.’
Today’s deal by RBS includes a settlement with heavyweight institutions that bought about 10% of the 2008 share issue: Standard Life, Legal & General, Aviva and Prudential and the Universities Superannuation Scheme
But it still has to strike a deal with thousands of smaller retail investors., with one of the outstanding groups - the RBoS Shareholder Action Group, representing 27,000 retail investors – having vowed to bring the matter all the way to court.
More than 35,000 shareholders who took part in the cash call allege RBS deliberately concealed the extent of its financial problems when it raised the money.
RBS said that it has made today’s settlement: “In order to minimise further material litigation expense and management distraction and without any admission of liability.”
The bank said the total settlement figure is covered by provisions it has already made.
The deal moves the bank closer to avoiding a lengthy and potentially embarrassing trial that could force its disgraced former executives take to the stand to discuss the darkest period in the bank's almost three-century history.
RBS chief executive, Ross McEwan, CEO said: “We have been very clear that we wanted to deal with as many of our legacy litigation issues as possible during 2015 and 2016.
‘We are pleased to have reached this agreement and hope that it will be accepted by the remaining claimant group(s) so that this long course of complex and costly litigation can now be concluded.”
The move comes after RBS saw its shares sink last Wednesday when it was announced it had failed the Bank of England’s annual stress test to see how banks would cope in another financial crash.
The bank has had to draw up a new capital plan and bolster its balance sheet by £2bn.
Ewan Stevenson, RBS's finance chief said: "We have taken further important steps in 2016 to enhance our capital strength, but we recognise that we have more to do to restore the bank's stress resilience including resolving outstanding legacy issues."
The tests were said to be the toughest yet set by the Old Lady of Threadneedle Street due to the unprecedented economic environment currently and were based on hypothetical scenarios.
These include a plunge in house prices and the global economy shrinking 1.9%.
Britain's largest seven lenders were all put to the test and RBS was the worst, with Barclays (LON:BARC) and Standard Chartered (LON:STAN) also struggling.
- Updates with Broker comment, shares prices -