RBS Likely To Foot A Bill Of Nearly $13 Billion To Settle Legacy U.S. Mortgage Issue

RBS: Royal Bank of Scotland Group logo
RBS
Royal Bank of Scotland Group

The Royal Bank of Scotland Group (NYSE:RBS) reported a profit for full-year 2017 late last week – making it the first full-year profit for the U.K. banking giant in ten years. But investors could not quite celebrate this news, as RBS’s attempts over recent months to settle its legacy U.S. mortgage issue with the Department of Justice (DoJ) and other state agencies hasn’t yielded any results. As RBS was one of the biggest originators of mortgage-backed securities (MBS) in the U.S. in the run-up to the economic downturn of 2008, a settlement is estimated to cost the bank billions of dollars over coming months – something that will likely send its results for this year in the red.

The actual amount RBS could end up paying the U.S. regulators is something that materially impacts the bank’s future, as the bank generated ~$16 billion in revenues for 2017 with an adjusted net income figure of less than $1 billionThis compares with estimates for the settlement amount currently ranging from $10 billion to $20 billion.

Using our interactive model for RBS, we estimate that the settlement amount will likely be around $13 billion. We arrive at this figure based on what its peers paid to put this matter to rest with the DoJ and other state Attorneys General, as detailed below.

  • First, we aggregated the settlement figures for six other banks: Since 2013, the Department of Justice (DoJ) has reached settlements with 7 global banking giants: Bank of America, JPMorgan, Deutsche Bank, Citigroup, Credit Suisse, Goldman Sachs, and Morgan Stanley. We aggregated the fines for 6 of these banks. We left out Citigroup, as the total size of MBS mis-sold by Citigroup ($3.5 billion) was well below the average figure of $23.4 billion for the other six, as well as the figure of $30.4 billion for RBS (as detailed in the FHFA lawsuit against each bank)
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  • We then represented the average settlement figure as a % of average securities mis-sold by the banks: The average settlement figure for these banks was just under $10 billion. As the average size of securities mis-sold was $23.4 billion, the settlement figure was roughly 42% of the total securities.

  • Finally, we multiplied the 42% average settlement figure with the $30.4 billion in RBS’s to arrive at our estimate of $12.8 billion

If you think our estimate is too small (or too large), then you can come up with your own estimate by making changes to our model.

Also, you can click here to understand the exact impact of a $13-billion settlement on RBS’s 2018 results.

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