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RBS - US Department of Justice case settled

Nicholas Hyett | 10 May 2018 | A A A
RBS - US Department of Justice case settled

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Royal Bank of Scotland has reached a settlement with the US Department of Justice over RBS's involvement in the sale of US residential mortgage-backed securities (RMBS) between 2005 and 2007.

Under the terms of the settlement RBS will pay $4.9bn (£3.6bn). Of this $3.46bn is covered by existing provisions.

The additional $1.44bn charge, required to cover the remaining penalty, will reduce the bank's CET1 ratio (a key measure of banking capitalisation) by approximately 0.5 percentage points, with a 9p reduction in total net assets per share.

Following the penalty RBS's CET1 ratio stands at 15.1%.

The shares rose 4.7% following the announcement.

View the latest share price and how to deal

Our View

Somewhere deep in RBS there's a decent bank trying to get out. Stripping the bank back to a few core businesses has proven time-consuming and expensive. But the end is finally in sight.

The troublesome capital resolution 'bad-bank' has been wrapped up, freeing reserves and bolstering the bank's capitalisation.

Costs are coming down, and loans to customers continue to grow. Record low interest rates and a competitive mortgage market are hampering net interest margins (the difference between what the bank pays out on deposits and charges on loans), but also means bad debts have stayed low.

After 9 years of losses the bank proved profitable last year (unexpectedly). Meanwhile the agreement with the Department of Justice (DoJ) means RBS' historic misdemeanours have now largely been put to bed, and the bank can set its sights firmly on the future.

Unfortunately that future will also involve the government unwinding its 70% shareholding in the bank. It's difficult to see how all those sell orders won't weigh on the share price - although with an average purchase price of just over £5 a share compared to a current share price of £2.88, the government may choose to hold off on sales for a while.

The good news is capital generation looks healthy. Despite the fine the CET1 ratio is comfortably above target, and it'll be interesting to see what management choose to do with the spare cash. A return to shareholders would be welcome, and looks more likely now the bank knows exactly how painful the DoJ fine will be.

Getting RBS back on the right path is a marathon task. The bank has run the first half surprisingly well, it remains to be seen if it's got the legs for a sprint finish.

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First Quarter Results (27/04/18)

First quarter underlying profits hit £792m, up 206% on the same period last year, as income rose 2.8% and costs excluding conduct charges fell 2.1%.

However, income growth was driven by an 18% increase in the more volatile fee and trading income, offsetting a small decline in net interest income.

The shares fell 1.5% in early trading.

Total loans to customers fell slightly and Net Interest Margin (the difference between what the bank pays to borrow and charges when it lends) was broadly flat. RBS has seen significant competitive pressure in the mortgage market, which has negatively impacted lending rates and mortgage volumes.

Operating costs, excluding conduct and litigation costs, were £39m lower as the bank becomes increasingly digital. Branch visits declined 7% versus last year, and the group saw a 21% increase in customers regularly using its banking app. The group now makes 55% of its personal unsecured loans through digital channels. The combination of lower costs and higher income mean the bank's cost to income ratio improved to 60.5%.

Bad loans increased to £78m, but remain relatively low.

RBS' CET1 ratio (a standard measure of a bank's capital) improved 0.5 percentage points to 16.4%.

Find out more about Royal bank of Scotland shares including how to invest>

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This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.