(Bloomberg) -- Royal Bank of Scotland Group Plc cleared one of the last barriers keeping the U.K. from reducing its stake in the lender and resuming dividends after it reached a tentative deal to pay $4.9 billion to resolve a U.S. mortgage probe.
Top executives said the U.K.’s biggest government-owned bank will begin discussions with British regulators about restarting dividends after a decade.
“The investment case for this bank is much clearer,” RBS Chief Executive Officer Ross McEwan said on a call with reporters on Thursday. This is “a milestone moment to restore capital distribution,” he said.
A preliminary settlement with the U.S. Department of Justice makes it easier for the U.K. government to attract buyers for its approximate 70 percent stake after bailing out RBS during the financial crisis. Chancellor of the Exchequer Philip Hammond welcomed the agreement in principle. “It marks another significant milestone in RBS’s work to resolve its legacy issues, and will help pave the way to a sale of taxpayer-owned shares,” he said in a statement.
McEwan, who restored the bank to profitability last year after taking the helm in 2013, said that the probe was “a major obstacle” for the authorities to begin reducing the state’s stake in RBS, “but the process is definitely in their hands.” The government has said it may begin selling shares by March next year. Charles Donald, named in April to head the financial institutions group at U.K. Government Investments, will oversee the sale.
The U.K. government spent 45.5 billion pounds ($61.6 billion) rescuing the Edinburgh-based firm, then the biggest bank bailout in the world. 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.
The bank’s shares climbed as much as 6.6 percent in London trading after the announcement, the biggest surge in more than a year.
The preliminary settlement “represents an excellent outcome for the group which should now open the door for the group to pass the Bank of England’s stress-testing exercise,” Gary Greenwood, an analyst at Shore Capital Group, wrote in a note to clients. “This would then pave the way for a resumption of ordinary dividend payments.”
Analysts at Keefe, Bruyette and Woods and Morgan Stanley also expect the lender to announce dividends this year. A share buyback is also a possibility in 2019, Morgan Stanley said.
While most of the cost will be covered by money the company has already set aside, the deal will cut second-quarter earnings by $1.44 billion, RBS said. Analysts had estimated the firm would pay more to resolve U.S. scrutiny of its mortgage business. Analysts at Deutsche Bank AG projected $9 billion, while Bloomberg Intelligence foresaw more than $11 billion.
RBS expects to reach a final agreement with the U.S. over the investigation into the packaging and sale of mortgage-backed securities in coming weeks. The amount of the penalty is a “fair number,” McEwan said. “I don’t see it changing.”
McEwan said the bank will work with the Prudential Regulation Authority on the stress tests before it can start remunerating investors with dividends. “We have to rework the stress tests and we have to clarify things with the regulators,” he said.
The deal in principle with the DOJ comes after Barclays Plc agreed to pay $2 billion to settle its U.S. probe in March, securing a penalty less than half of what U.S. authorities originally demanded.
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