Photographer: Jacob Kepler/Bloomberg

RBS to Pay $5.5 Billion in FHFA Mortgage-Bond Settlement

Updated on
  • Deal clears a hurdle for U.K. government to cut its stake
  • Penalty is the biggest after Bank of America’s $9.3 billion

Royal Bank of Scotland Group Plc agreed to pay $5.5 billion to settle the second of three major U.S. mortgage-backed securities probes the government-owned lender must overcome before it can fully return to the private sector.

The accord between the British bank and the U.S. Federal Housing Finance Agency is the second-biggest the FHFA has extracted and, according to a statement, is to settle a lawsuit alleging RBS sold faulty mortgage bonds to Fannie Mae and Freddie Mac from 2005 to 2007. RBS must still reach a deal with the U.S. Department of Justice on a separate investigation into similar claims, which could be even more costly if the precedent set by American banks is followed.

Following the FHFA settlement, RBS will still have almost $4 billion of provisions for U.S. mortgage bonds principally related to the DOJ probe. The bank didn’t give any indication of when it might settle the investigation, although it said it may need to make “substantial” fresh provisions for the case.

RBS is one of the last global lenders to settle years of legal wrangling by the FHFA that’s resulted in more than $30 billion in penalties since the agency began litigating over the pre-crisis sale of mortgage bonds. The British lender’s settlement ranks behind only that of Bank of America Corp., which agreed to pay $9.3 billion in 2014. JPMorgan Chase & Co. settled for $4 billion, Deutsche Bank AG paid $1.9 billion and HSBC Holdings Plc paid out $550 million.

Set Aside

The Edinburgh-based lender, rescued by the U.K. government in the financial crisis, had set aside about 6.6 billion pounds ($8.5 billion) of provisions related to as many as 15 mortgage investigations and lawsuits. RBS will get about $754 million reimbursed from indemnification agreements signed with third parties it didn’t name.

The settlement is “a stark reminder of what happened to RBS in its past,” when “it put global ambitions ahead of the interests of its customers,” Chief Executive Officer Ross McEwan said on a call with reporters. “This bank and British taxpayers have paid a very high price for these poor decisions.”

The shares fell after the announcement and closed 2 percent lower at 251.5 pence in London, paring their gain this year to 12 percent.

The main lawsuit against RBS from the FHFA was in the U.S. District Court for the District of Connecticut and related to about $32 billion of MBS. The bank settled similar claims from the U.S. National Credit Union Administration filed in California and Kansas in September for $1.1 billion.

Waiting for Justice

RBS has been waiting to enter active negotiations with the DOJ following the election of President Donald Trump, which has delayed progress toward a deal due to changes among senior-level staff at the agency. Barclays Plc is preparing to fight the U.S. government in court over similar allegations after balking at paying the amount sought in negotiations, which was more than $5 billion, people with knowledge of the talks have said.

There have been “no discussions with the DOJ of any substance so far; there is nothing that you read across from this,” Chief Financial Officer Ewen Stevenson said on a call with analysts. “We would still like to get it resolved, if we could, during this calendar year,” but “as the year progresses, it gets increasingly challenging,” he said.

Drawing a line under the U.S. investigations would clear a significant barrier in McEwan’s task to return RBS to profit and restore dividends, and would also make it easier for the U.K. government to sell its majority stake. The CEO must also reach a deal with the European Union over an alternative plan to sell its Williams & Glyn consumer division to meet state-aid rules.

RBS closed its U.S. 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 U.K. and Ireland. McEwan has previously said he can’t claw back compensation from staff at the unit because pay decisions at the time didn’t include such restrictions.

“Today’s settlement removes a significant obstacle that was previously blocking the resumption of dividends,” Bernstein analysts including Chirantan Barua said in an emailed note. Barua estimated the dividend next year will be 10 pence per share, a yield of about 4 percent. “The W&G settlement with the European Commission remains the other remaining significant obstacle.”

    Before it's here, it's on the Bloomberg Terminal.