RBS clears path to award dividends after US$4.9b deal

London

ROYAL Bank of Scotland Group (RBS) cleared one of the last barriers keeping the UK from reducing its stake in the lender after it reached a tentative deal to pay US$4.9 billion to resolve a US mortgage probe.

Its top executives also said that the taxpayer-controlled bank will commence discussions with British regulators about restarting dividends after a decade. The Edinburgh-based lender expects to reach a final agreement with the US over an investigation into the packaging and sale of mortgage-backed securities in coming weeks.

"Removing the uncertainty over the scale of this settlement means that the investment case for this bank is much clearer," RBS chief executive officer Ross McEwan said in a statement early on Thursday. It is "a milestone moment", and "the price we have to pay for the global ambitions pursued by this bank before the crisis".

A preliminary settlement with the Department of Justice also makes it easier for the UK government to attract buyers for its approximate 70 per cent stake after bailing out RBS during the financial crisis.

The UK government spent £45.5 billion (S$82.7 billion) rescuing the Edinburgh-based firm, then the biggest bank bailout in the world. RBS closed its US mortgage-bond trading and origination business in 2015 as it cut investment banking operations around the world to focus on consumer and commercial lending in the UK and Ireland.

The bank's shares climbed 4.7 per cent to 289.10 pence in London trading after the announcement.

It "represents an excellent outcome for the group which should now open the door for the group to pass the Bank of England's stress testing exercise", said Gary Greenwood, an analyst at Shore Capital Group in a note to clients. "This would then pave the way for a resumption of ordinary dividend payments."

While most of the cost will be covered by money that the company already set aside, the deal will cut second-quarter earnings by US$1.44 billion, the bank said. Analysts had estimated that the firm would pay more to resolve US scrutiny of its mortgage business. Deutsche Bank AG projected US$9 billion, and Bloomberg Intelligence more than US$11 billion.

There are signs that other US and international banks may soon reach their own accords. In January, Wells Fargo & Co chief financial officer John Shrewsberry told Bloomberg that his firm would likely hash out terms this year. While he declined to discuss the potential cost, the firm took a US$3.3 billion litigation charge late in 2017, mainly for mortgage-related issues.

Nomura Holdings may make additional provisions after booking more than 30 billion yen (S$366.4 million) in costs tied to a US probe into mortgage-bond sales before the crisis, a person familiar with the matter said last month.

In March, Barclays agreed to pay US$2 billion to settle its US probe, securing a penalty that was less than half of what US authorities originally demanded. The Justice Department originally wanted a fine of about US$5 billion, but the British lender refused to pay any more than US$2 billion, Bloomberg had reported in 2016. BLOOMBERG