RBS & Credit Suisse Mortgage Practices Under SEC Scrutiny

September 29th, 2011 by Trefis Team
RBS: Royal Bank of Scotland Group logo
RBS
Royal Bank of Scotland Group

RBS Group (NYSE:RBS) and Credit Suisse (NYSE:CS) are under scrutiny from the U.S. Securities and Exchange Commission (SEC) over their handling of under-performing mortgage loans. [1] With the U.S. government bearing down on all major financial institutions which played a part in the mortgage-led economic crisis, SEC’s investigation will complement the New York attorney-general’s investigation into the mortgage practices of RBS (NYSE:RBS), Bank of America (NYSE:BAC), Deutsche Bank (NYSE:DB), Goldman Sachs (NYSE:GS), UBS (NYSE:UBS) and JPMorgan Chase (NYSE:JPM) among others.

We maintain a $12.60 price estimate for RBS’ stock and a $49 price estimate for Credit Suisse’s stock, which are at a significant premium to their market prices. While we believe current prices reflect the sentiments of a market which is reacting heavily to the growing uncertainty of the European debt situation, we are in the process of reviewing our price estimates to factor in the effects of weak performances in mortgage-portfolios and an increasing number of lawsuits against the banks.

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The SEC will be looking into 3 aspects of the banks’ mortgage-related practices:

  1. Whether the banks misled shareholders by holding back on the high number of loan repurchase requests they expected – consequently setting aside lower than required provisions for settlements and litigation expenses
  2. Whether the banks were aware of the actual substandard quality of the mortgage-backed securities that they underwrote and sold
  3. Whether the banks were involved in double-dipping activities, through which they reached settlements for bad loans with the loan originators, but did not disclose details of the settlements – thereby pocketing a securitizing fee and a settlement fee

As U.S. regulators continue to crack the whip on financial institutions on a variety of issues, we expect more names to be added to this list of banks being investigated by the SEC.

See our complete analysis for RBS | Credit Suisse

Notes:
  1. SEC probes banks over mortgage loans, The Financial Times, Sept 28 2011 [↩]