The Royal Bank of Scotland (RBS) has finally received its punishment for selling toxic mortgage bonds in the heady days before the global financial crisis.

Its fine of $4.9bn came in below analysts’ forecasts and chief executive Ross McEwan says this represents a ‘milestone moment’ for the bank.

‘Reaching this settlement in principle with the US Department of Justice will, when finalised, allow us to deal with this significant remaining legacy issue and is the price we have to pay for the global ambitions pursued by this bank before the crisis,’ says chief executive Ross McEwan.

‘Removing the uncertainty over the scale of this settlement means that the investment case for this bank is much clearer.’

The market is buoyed by the news, with the company’s share price up 4% to 287.1p.

When the bank reported its first profit in a decade in February 2018, the extent of the US Department of Justice’s punishment was still unknown hence its share price dropped at the time.

Russ Mould, investment director at AJ Bell, says that the fine could have been worse. ‘Some estimates suggested the potential bill could have been $10bn or more’ although he adds that the penalties dished out to RBS’ European peers Deutsche Bank and Credit Suisse were both lower than originally expected.

RBS had already set aside $3.5bn to tackle the litigation so the extra costs only come in at $1.4bn. While this may still sound high, the total amount of regulator fines the bank has paid since 2011 totals £20.9bn.

This goes some way to show how long RBS investors have been suffering and perhaps an indication of the relief felt on a line being drawn under the misconduct today.

Now the bank has closure over the misconduct charges, it can start moving forward with the potential of bringing back a dividend, last seen in 2008.

Joseph Dickerson, analyst at investment bank Jefferies, says that after taking into account the fine and its recent pension top up, the banks common equity tier one (CET1) ratio is 15.1%.

This is above the targeted 14% CET1 ratio and equates to around £2.2bn or about 7% of its market cap.

GOING PRIVATE

Chancellor Philip Hammond has signalled his intention to sell down the government’s stake in RBS which is still around 70%. He hopes to raise £3bn in RBS stake sales by the end of the current tax year which ends in April 2019.

The absence of the Department of Justice’s attentions should make the stake sell easier as the bank can now concentrate on operating its business. It has been cutting costs and driving through efficiencies for some time.

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Issue Date: 10 May 2018