RBS to Pay $5.5 Billion to Settle Mortgage-Backed Securities Probe--Update

Royal Bank of Scotland Group PLC on Wednesday agreed to pay $5.5 billion to the U.S. Federal Housing Finance Agency to settle a probe into its sale of toxic mortgage-backed securities in the run up to the financial crisis.

RBS said in a statement that it had already set aside funds to cover most of the cost of the settlement. The 71% U.K. government owned bank will have to take an additional charge of $196 million which will be realized in its coming results in August.

RBS had set aside $8.3 billion to cover a range of allegations linked to its role in packaging and selling on subprime mortgages in the lead up to the financial crisis. The bank still faces probes from several U.S. agencies including a criminal and civil investigation by the U.S. Department of Justice.

Settling these probes is a major hurdle for RBS as it continues its slow return to private hands. U.K. government officials have said they would not sell down the government's stake until they have clarity on the size of the U.S. fines RBS may face. RBS warned Wednesday that "further substantial provisions and costs may be recognized...depending upon the final outcomes."

Under the settlement, RBS will pay the FHFA $5.5 billion but is eligible for a $754 million reimbursement under indemnification agreements with third parties.

Write to Max Colchester at max.colchester@wsj.com

LONDON -- Royal Bank of Scotland Group PLC on Wednesday agreed to pay $5.5 billion to the Federal Housing Finance Agency to settle a probe into its sale of toxic mortgage-backed securities in the run up to the financial crisis.

The settlement clears one of several obstacles the U.K. government-controlled bank faces before it can resume dividend payments and continue its return to private hands. RBS said in a statement that it had already set aside funds to cover most of the cost of the settlement. The bank will have to take an additional charge of $196 million, which will be realized in its coming results in August.

In settling, RBS becomes the 17th bank to strike a deal with the FHFA over the sale of subprime mortgages to Fannie Mae and Freddie Mac. The settlement came in higher than investors expected, tempering the idea that U.S. agencies would soften their approach to foreign banks under the Trump administration.

More pain could still be ahead. RBS had set aside $8.3 billion to cover a range of allegations linked to its role in packaging and selling on subprime mortgages in the lead up to the financial crisis. The bank still faces probes from several U.S. agencies including criminal and civil investigations by the U.S. Department of Justice. RBS warned Wednesday that "further substantial provisions and costs may be recognized...depending upon the final outcomes." Analysts at Jefferies estimate RBS will set aside a further $2.5 billion by the end of the year to cover future Justice Department settlements. So far, the bank hasn't had meaningful discussions with the Justice Department over any settlement, said RBS Chief Financial Officer Ewen Stevenson.

That could slow the grinding process of returning RBS to private hands. U.K. Treasury officials have said they would not sell the government's 71% stake until they have clarity on the size of the fines RBS may face.

Under the FHFA settlement, RBS will pay the $5.5 billion, but is eligible for a $754 million reimbursement under indemnification agreements. Mr. Stevenson admitted the deal was "at the high end of the other settlements" but said there should be no read across to potential settlements with the Justice Department. RBS paid more per mortgage bond sold than any other bank that has settled with the FHFA to date.

RBS is involved in another case with the FHFA where they are named co-defendant with Japanese bank Nomura. This is still ongoing following an appeal.

The FHFA settlement "is a stark reminder of what happened to this bank before the financial crisis, and the heavy price paid for its pursuit of global ambitions," RBS Chief Executive Ross McEwan said.

The bank has shed a large chunk of its bond trading operations in the U.S. and is in the process of retreating to its U.K. base.

Razak Musah Baba contributed to this article

Write to Max Colchester at max.colchester@wsj.com

(END) Dow Jones Newswires

July 12, 2017 10:53 ET (14:53 GMT)