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Royal Bank of Scotland to Pay $4.9B for MBS Suit Settlement

Zacks

The Royal Bank of Scotland Group plc RBS, headquartered at Edinburgh, the U.K, has entered a tentative deal for a $4.9-billion (£3.62 billion) settlement, for the resolution of a U.S. Department of Justice probe, Reuters reported. The bank had been charged for misguiding investors in sale of mortgage-backed securities (MBS) prior to the financial crisis.

Notably, existing provisions will cover $3.46 billion of the anticipated civil settlement for the bank, while the remaining amount of $1.44 billion will be charged against the second-quarter 2018 earnings.

RBS chief executive Ross McEwan called the deal a "milestone." "Removing the uncertainty over the scale of this settlement means that the investment case for this bank is much clearer," he said in a statement.

The Probe

The investigating department, the U.S. Attorney's Office in Massachusetts, put his confirmation of entering an agreement in principle with Royal Bank of Scotland for resolving civil claims. These claims were associated with MBS sold from 2005 to 2008. "Further details remain to be negotiated, however, before a formal agreement can be reached," the office stated.

Post the financial crisis of 2008, regulators, including the Justice Department, have ramped up their efforts to penalize financial entities for wrongdoings and misrepresentation of facts while selling investment products.

Royal Bank of Scotland has been combating several litigation issues related to MBS. Notably, a criminal probe is also on going on the bank and its former employees for involvement in selling of risky securities, per the U.S. Attorney's Office in Massachusetts. However, the aforementioned settlement includes only civil penalties and no criminal charges.

Similar Cases

In recent months, the bank settled similar cases for being probed by the state attorneys general of California and New York, for $125 million and $500 million, respectively.

In July 2017, RBS agreed to settle a lawsuit by paying $5.5 billion that accused it of misrepresenting facts pertaining to MBS by the Federal Housing Finance Agency.

Previously, in September 2016, RBS had agreed to the resolution of claims over the MBS sold to credit unions by paying $1.1 billion. The announcement was made by the U.S. National Credit Union Administration.

The Justice Department had also entered similar settlements with other banks, including Citigroup C, Deutsche Bank DB and JPMorgan JPM.

In Conclusion

We believe all these settlements indicate bank’s efforts to get past the legal headwinds and concentrate on the improving operational efficiency.

In six months’ time, the company’s share price has declined 2.7% on the NYSE as compared with the 6.5% fall recorded by the industry.


Royal Bank of Scotland currently carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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