'Humbling' U.S. settlement clears crisis-era hangover for RBS

[May 10, 2018]  By Emma Rumney, Lawrence White and Sinead Cruise

LONDON (Reuters) - Shares in Royal Bank of Scotland <RBS.L> rose as much as 6 percent on Thursday after it secured a far lower than expected settlement with U.S. authorities, paving the way for a long-awaited return of cash to British taxpayers who provided support during the financial crisis.

The $4.9 billion fine resolves a U.S. Department of Justice investigation into the bank's sale of mis-priced mortgage-backed securities before the financial crisis and clears one of the most debilitating hangovers for the bank from that era.

"It's very humbling to have to announce a settlement of this magnitude," the bank's finance director Ewen Stevenson told reporters on a conference call.

While the agreement is only in principle, its arrival clears the way for taxpayer-backed RBS to restore its dividend and for the government to start selling down its more than 70 percent stake in the bank.

RBS executives said that while it will take a few weeks to finish the paperwork, the total penalty is unlikely to increase. Analysts had estimated the DOJ could impose a fine of up to $12 billion.

"The number is a firm number," finance director Stevenson said.

RBS said it would be able to cover the bulk of the penalty out of existing provisions alongside a $1.44 billion charge it will take in the second quarter of this year.

"This marks a watershed for RBS – for as long as this investigation cast a pall over earnings and forecasts there was nowhere for investors to really go," said Neil Wilson, chief analyst for Markets.com.

CRISIS CASUALTY

The Department of Justice previously settled with banks including Citigroup <C.N>, Deutsche Bank <DBKGn.DE>, JPMorgan Chase <JPM.N>, Credit Suisse <CSGN.S>, Morgan Stanley <MS.N>, Goldman Sachs <GS.N>, Bank of America <BAC.N> and Barclays <BARC.L> for a total of more than $60 billion.

Bank of America paid the highest sum of $16.7 billion, while Barclays, which settled in March, had the smallest figure at $2 billion.

Once the world's largest bank by assets, RBS was one of the biggest casualties of the financial crisis which crippled credit, stock and housing markets and upended the global economy.

It narrowly avoided insolvency in 2008 after the government agreed a 45 billion pound ($61 billion) bailout, just six months after the bank raised 12 billion pounds of emergency cash from shareholders.

Chief Executive Ross McEwan's predecessor, Stephen Hester, who joined the bank following the bailout in 2008, said he had texted McEwan this morning to congratulate him and the team.

"That's the last really big milestone before the bank can be seen to be fully normalized... It's taken an awfully long time to achieve but I think it's good news," Hester, who is now CEO of RSA <RSA.L>, told a media call for the insurer's first quarter results.

Morning commuters walk past a branch of the Royal Bank of Scotland (RBS) in London, Britain, November 4, 2011. REUTERS/Andrew Winning/File Photo

The looming fine had been a big obstacle to the government's plan, laid out in November, to begin reprivatizing the bailed-out lender before the end of the 2018-19 fiscal year - a much needed boost to finance minister Philip Hammond's coffers.

BACK TO DIVIDENDS

After ten years of restructuring, shedding trillions in assets and paying conduct fines, Thursday's settlement means RBS's last large outstanding legacy issue is out of the way.

Chief Executive McEwan also said the bank will start discussing paying RBS's first dividend in a decade with regulators this month, leaving open the possibility the bank would start returning years' worth of excess capital to shareholders before its next annual results.

"The fact they can begin to think about how to return that to shareholders is a major and long-awaited change," said Olivia Treharne, a fund manager at Legal & General Investment Management, RBS's number 10 shareholder according to Thomson Reuters data.

However, one of the bank's largest 20 investors said shareholders should be cautious about the prospects of getting their hands on the bank's excess capital just yet.

"This is hardly a Silicon Valley company. I'd like to see much of that plowed into the bank's IT systems," said the investor, who asked not to be named.

McEwan had hoped the settlement would be sealed before the end of 2017, but staffing changes at the DOJ following the inauguration of U.S. President Donald Trump saw negotiations with a number of banks slip back.

RBS however appears to have benefited from settling under the Trump administration, which has been less hostile towards the banking sector than that of his predecessor Barack Obama.

RBS executives said one reason for the settlement being below estimates is that RBS did not have to pay out billions of dollars in consumer relief, a staple of such settlements under the Obama administration.

($1 = 0.7372 pounds)

(Additional reporting by Carolyn Cohn; Editing by Keith Weir)

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