By Jill Treanor
Royal Bank of Scotland is preparing to take a multi-billion-pound hit related to a toxic bond misselling scandal that dates back to the 2008 crisis.
The bank, 73% owned by the British taxpayer, is reported to be mulling whether to set aside funds in anticipation of a settlement with the US Department of Justice over the way it packaged up and sold mortgages almost a decade ago.
Chief executive Ross McEwan has repeatedly warned about the financial impact of the DoJ investigation on the bailed-out bank, which is already on course to report its ninth consecutive year of annual losses when it reports its figures for 2016 next month. Since taking over in 2013, McEwan has been attempting to tackle the issues that date back to the crisis.
Speculation that RBS will take a provision for the DoJ settlement over residential mortgage backed securities (RMBS) misselling has arisen because of the spate of settlements agreed with other major European banks in late December. RBS would not comment on Wednesday.
But analysts have been raising the possibility of RBS being able to quantify the settlement since 23 December when Deutsche Bank and Credit Suisse agreed a combined $12.5bn (£9.8bn) deal with the DoJ. At the time, Barclays took the unprecedented decision to refuse to settle with the authorities.
The scale of any provision that RBS might decide to take was not clear on Wednesday, but in the past the possibility of a bill of more than $12bn has been raised by UK Financial Investments, the body which looks after the taxpayer stake in the bailed-out bank.
James Leigh-Pemberton, who runs UKFI, told MPs in November that the DoJ settlement “might be $5bn, it might be $12bn” based on the estimates at the time by City analysts.
Speculation that RBS might be considering taking a provision has been raised when analysts began to publish their forecasts for the bank’s 2016 financial year. Last week Bloomberg quoted research by analysts at Goldman Sachs as saying: “In light of recent US DoJ settlements with other banks, we see the possibility that RBS will book a significant provision as early as the fourth quarter.” Five other analysts surveyed by Bloomberg produced an average of $3.8bn.
Even when the bank takes a provision, it may not be the final amount that the DoJ will extract from RBS for the misselling scandal, which is related to the complex packaging of home loans that was a lucrative business for the banking industry until the 2008 crisis.
The uncertainty about the size of the bill has been among the reasons cited by the chancellor, Philip Hammond, for abandoning any hopes of selling off any more shares in the bank. So far, only a 5% stake has been sold off – at a £1bn loss to the taxpayer.
RBS has repeatedly reminded the City that the DoJ punishment will knock its finances. In September, the bank said:“RMBS litigation and investigations may require additional provisions in future periods that in aggregate could be materially in excess of the [current] provisions.”
The bank has set aside £3.8bn to cover other aspects of RMBS and billions more for other misdemeanours. The RMBS investigations are wide-ranging across a number of authorities and in September, RBS paid $1.1bn to National Credit Union Administration to resolve the long-running matter.
Taxpayers paid £45.5bn for shares in RBS in 2008 and 2009 to stop the Edinburgh-based bank collapsing during the financial crisis. It has not made an annual report since 2007 and since then has incurred losses of more than £50bn.
Its shares closed on Wednesday at 226p – below 502p, the average price at which the Treasury bought the shares during the crisis.