RBS Said to Mull Multibillion-Dollar Charge Over U.S. Mortgages

(Bloomberg) -- Royal Bank of Scotland Group Plc is considering taking a multi-billion dollar charge in the fourth quarter for a U.S. mortgage securities probe, that would give an indication of the size of the full settlement, according to people with knowledge of the matter.

The U.K. taxpayer-owned lender could base a provision on Deutsche Bank AG’s $7.2 billion settlement and Credit Suisse Group AG’s $5.3 billion accord with the U.S. Justice Department, said the people, who asked not to be identified because the details are private.

The Edinburgh-based bank is among the final few global lenders yet to settle in a years-long probe that’s garnered more than $50 billion in penalties for the DOJ since it began investigating the pre-crisis sale of mortgage bonds. Before taking a provision, RBS would need approval from its non-executive board and external auditors, according to a person with knowledge of the matter. RBS must also consider that President Elect Donald Trump may make changes at the DOJ that could affect banking industry penalties, the person said.

“In light of recent U.S. DOJ settlements with other banks, we see the possibility that RBS will book a significant provision as early as the fourth quarter,” Goldman Sachs Group Inc. analysts, led by Martin Leitgeb, wrote in a note to clients on Monday. RBS will probably face a $3.8 billion DOJ settlement in total, according to the average estimate of five other analysts surveyed by Bloomberg News.

In the fourth quarter, RBS could take a 2.7 billion-pound ($3.3 billion) conduct and litigation charge, driven by the U.S. probe, Citigroup Inc. analysts led by Andrew Coombs wrote in a note to clients last month. While the bank has about 9 billion-pounds of provisions for regulatory and legal matters on its balance sheet, it will probably need more to cover residential mortgage-backed securities settlements and associated legal costs, according to analysts. The bank is scheduled to report full-year earnings on Feb. 24.

Senior RBS executives are said to favor a charge in the fourth-quarter because the bank is on-track for a 2016 net loss. And making such a provision before a settlement is reached would reduce the impact on financial performance this year, the people said.

Drawing a line under the U.S. investigations would also clear a significant barrier for Chief Executive Officer Ross McEwan in his task to return RBS to profit and restore dividends. While he must also divest its Williams & Glyn consumer division, settling the probes could make it easier for the government to sell its majority stake in the lender. 

“Trying to put more of these one-time items into the rear view mirror, of course, is helpful to any normalization of the investment case,” said Barrington Pitt Miller, an analyst at Janus Capital Group in Denver. “RBS may be able to construct a sensible case with their auditors and suggest that they now have a better basis for calculation of a potential penalty, against U.S. and now non-U.S. banks in the RMBS case.”

RBS is the last of 18 banks to settle Federal Housing Finance Agency accusations it sold faulty mortgage bonds to Fannie Mae and Freddie Mac from 2005 to 2007. The amount of securities subject to the FHFA’s complaints can serve as a guide as to how much the DOJ will seek in penalties, according to Bloomberg Intelligence. RBS sold $32.1 billion, more than Deutsche Bank and Credit Suisse combined.

“We see a settlement being imminent,” Chirantan Barua, an analyst at Sanford C. Bernstein & Co. in London, wrote in a note to clients this month. “Traditionally banks have desisted from taking provisions against the DOJ, but given that there are very few left, there could be a $1 billion top up in the fourth quarter.”

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