RBS’s prospects for the future are improving but the bank, headquartered in Edinburgh, may have to set aside even more money to settle its fines due soon from the American Department of Justice.
Those were the main conclusions of a broker’s note which suggested that the bank could have to set aside an additional £1 billion on top of the £3bn already in place to settle the US federal case over toxic mortgage bonds.
Analysts at RBC Capital have concluded that the Department of Justice fine may increase by an additional £4bn, and while RBS were not commenting yesterday – as is their usual policy – it is clear that the bank are ready to meet at least the £3bn sum and are hoping for a lesser fine.
RBC analyst Robert Noble wrote: “We expect an additional £1bn in provisions due to the Department of Justice fine on [residential mortgage-backed securities] but if fines are as high as some US banks, the additional provision could be an additional £4bn.”
RBS has already paid £4.4bn to the US Federal Housing Finance Agency over its selling of toxic mortgage-backed securities to US government-backed loan firms Fannie Mae and Freddie Mac.
The state-owned bank has also almost settled the long-running dispute with the European Commission (EC) over the sale of its Williams & Glyn.
The EC insisted on the sale of the 300 branches in England as a condition of allowing the £45.5bn bailout of the bank during the 2008 financial crisis.
The EC has told the Treasury that it is no longer insisting on the Williams & Glyn sale, and RBS is instead spending £835 million to support challenger banks and boost competition in the sector.
The broker’s note from RBC Capital generally sounded a positive note about RBS, which hopes to start paying dividends once again after the so-called “historic” issues such as the US fines are dealt with.
RBC said that “underlying profitability is recovering” and added that there were “fewer margin headwinds going forward as the structural hedge drag is not as large as we initially expected”.
The analysts upgraded their advice on RBS to “sector perform” from “underperform” yesterday, and increased their target price on shares from 210p to 240p.
At one point yesterday the share price was again back to just over the 250p mark, but fell to 248.6p or 0.66 per cent down on the day.
The broker’s note explained that RBC felt capital risks were shrinking for the group, which includes the NatWest bank, but warned that they saw upside for the shares only if the bank was able to generate excess capital, “which seems unlikely in the near term”.
However, it added “the headwinds are less than previously estimated giving the broker more confidence on revenues going forward”.
The latest comments on the bank come after RBS advised investors on its interim performance last month, revealing that it had returned to profit in the second quarter of the year. Litigation and conduct costs for the first half of 2017 amounted to £396m.
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