Investors in Royal Bank of Scotland Group PLC (LON: RBS) breathed a sigh of relief on Thursday following news the taxpayer-owned lender has agreed a less than expected payment with the US Department of Justice (DoJ) to settle the probe into the sale of residential mortgage-backed securities (RMBS) ahead of the 2008 financial crisis.
RBS it has agreed to pay US$4.9bn to resolve the DoJ case, much less than estimates published in the media ranging up to US$13bn, with other big US and European banks having already settled.
READ: RBS up as it agrees to pay US$4.9bn to resolve US DoJ probe into sale of mortgage-backed securities
The move could lead to a triple-bonus for the FTSE 100-listed lender, with analysts thinking the settlement should open the door for the group to pass the Bank of England’s stress testing exercise, a resumption of ordinary dividend payments, and, potentially, a return of additional surplus capital to shareholders by way of share buy-backs which may be used as a mechanism to reduce the UK government’s around 70% stake in the group.
In a note to clients, analysts at UBS said: “The removal of uncertainty around the RMBS settlement should, we think, see RBS pass the 2018 UK bank stress test, returning to paying a dividend with FY18 results.”
They added “The removal of RMBS settlement tail risk will also make it easier in our view for the UK government to begin realising part of its £22bn stake in RBS.
“Last year, Chancellor Hammond confirmed plans to raise £3bn in cash from RBS stake sales in this tax year, which ends in April 2019.”
The Swiss bank’s analysts also said that: “With the job of RMBS settlement almost complete and a return to dividends in sight, we also expect RBS to confirm a successor to current CEO Ross McEwan in 2H18.”
READ: RBS reports first profit in a decade but shares fall on concerns about hefty US fines
Meanwhile, Michael Hewson, chief market analyst at CMC Markets UK noted that last year RBS finally returned to profit after a decade of losses, and while it was only a minor profit there was still a sense that the bank may have turned a corner in turning the tide of regular losses.
However, he added, not surprisingly, the market reaction to the £752mln profit was a little underwhelming given that the bank still had to settle its dispute with the DoJ and had only set aside another £764mln in respect of that hoped for settlement.
Hewson noted that the provisions top up brought the total provision up to US$4.4bn, still leaving it well short of what investors feared the total bill might be.
So, the analyst added: “It is therefore with a sense of relief that this morning’s provisional news that the bank had reached a provisional settlement of $4.9bn has seen the share price surge higher as the prospect of a significant obstacle that had been hanging over the bank looks finally to have been cleared.”
He said: “The removal of this cloud of uncertainty also raises the likelihood that the bank may be able to report a profit for this year as well, now that the prospect of additional large scale provisions appears to have been removed.”
Since RBS’s full year results were published in April, the bank has announced plans to further cut costs with 162 branch closures, in addition to the restructuring plans which were announced in February.
READ: RBS to close 162 branches as part of Williams & Glyn cull
Hewson added: “There will be some criticism that the sale of the stake would incur a loss for the taxpayer but it is also true that any prospect of making a profit from the bailout disappeared long ago.
“The bank's losses over the last ten years are already in the region of £65bn, in addition to the cost of the bailout, which means it was never likely that the stake would ever be sold at a profit.”
He also pointed out that; ”This doesn’t mean RBS problems are over given the current questionable behaviour at its now defunct Global Restructuring Group, which continue to hang over the bank like a black cloud, particularly given the reluctance of the regulator to sanction the full release of the report into the public domain. Provision here was left unchanged at £400m in February, though this could come in higher in the coming months.”
Hewson concluded: “What is more uncertain is the reputational damage which could well be longer lasting, raising the prospect of how you value the potential intangible effects of future lost business this episode is likely to cause in the future.
“The rebranding to NatWest of RBS branches in England may well go some way to addressing that particular issue.”
On the underlying core business at the end of last year the bank continued to do fairly well, though its net interest margin remains on the low side at 2.04%, despite the recent rise in interest rates, while net income fell short of expectations.”
In afternoon trading, RBS shares were 3% higher at 284.4p.
Analysts at Shore Capital pointed out that their fair value for the stock ahead of the DoJ settlement announcement was 265p, “which included a 20% haircut for ‘tail risk’ associated with potential future misconduct redress and litigation costs”.
They said: “Deducting 9p to reflect the incremental RMBS charge while reducing the discount to 10% would see this valuation increase to 290p (before any incremental adjustments associated with the recent Q1 results, which we have yet to process and expect to be relatively small).”