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RBS share price surges after it agrees £3.6bn fine over subprime lending

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Written by: Lana Clements
10/05/2018
State-backed bank Royal Bank of Scotland (RBS) has been fined £3.6bn ($4.9bn) by US regulators over its subprime lending in the lead up to the financial crisis.

The penalty from the US Department of Justice resolves the investigation into the lender’s “issuance and underwriting of US residential mortgage-backed securities” between 2005 and 2007, RBS said this morning.

Chief executive Ross McEwan, said: “Today’s announcement is a milestone moment for the bank.

“Reaching this settlement in principle with the US Department of Justice will, when finalised, allow us to deal with this significant remaining legacy issue and is the price we have to pay for the global ambitions pursued by this bank before the crisis.

“Removing the uncertainty over the scale of this settlement means that the investment case for this bank is much clearer.”

RBS’s share price jumped around 5% in morning trading, following the news.

The bank said around £2.55bn ($3.46bn) of the fine will be covered by existing provision with the rest absorbed as a hit in the second quarter of 2018.

Cloud of uncertainty lifted

Michael Hewson, chief market analyst at CMC Markets UK, said: “This morning’s 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.

“Despite this morning’s surge the share price at 287p still remains below the highs for this year and below the 330p level that the UK government sold its first stake back in 2015.

“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.”

‘Fine could have been worse’

Some estimates suggested the fine could have been $10bn or more. RBS has already taken $3.5bn in provisions to cover the cost, so the second quarter of this year will see only $1.4bn (£1.1bn) in extra costs.

According to AJ Bell, this will take RBS’s total litigation, fines and conduct bill, including PPI claims, to £20.9bn since 2011, a figure which compares to its current market capitalisation of £33bn and equates to 174p per share.

Russ Mould, AJ Bell investment director, said: “The damage suffered by investors has been enormous.

“For dividends to start flowing again the bank still needs to prove it can start to record consistent profits. The Q1 2018 states pre-tax profit of £1.2bn was a good start and RBS will be hoping that the 2019 deadline for PPI claims can help it remove another cost burden from its profits.

“But the bank still needs to keep its nose clean, manage its loan book effectively and hope the global economy does not roll over, even if analysts have pencilled in forecast dividend payments of 5.4p a share for 2018 and 12.2p for 2019.”

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