Shareholders Should Not be Concerned by RBS Allegations say Analysts

If evidence of wrongdoing by top management surfaces at RBS, analysts expect considerable reputational damage and a commensurate decline in business activity and fair value

Erin Davis 18 November, 2015 | 7:57AM
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We’re not yet concerned by reports that emerged yesterday that the U.S. Department of Justice is pursuing criminal cases against executives at JPMorgan Chase and Royal Bank of Scotland (RBS) for allegedly misrepresenting the quality of mortgage securities, as we think that the probes are targeting individuals rather than the firms themselves.

We therefore think that any charges, if eventually filed, would be unlikely to result in material additional fines for the banks. We don’t expect a replay of BNP Paribas’ $9 billion fine for sanctions violations in 2014, for example, as those charges were filed against the firm, not individuals, and the fine was especially large to reflect BNP’s lack of cooperation with the investigation. We also don’t expect any wider fallout, such as either bank's license being in jeopardy or the firms risking being labelled criminal enterprises, as these potential repercussions, too, relate to firm-level, not individual-level, criminal charges. We plan to maintain our fair value estimates of £3.90 for RBS.

At this point, we have no reason to suspect that current C-level executives at either of these banks will be accused of criminal activities. However, if evidence of wrongdoing by top management surfaces, we’d expect considerable reputational damage and a commensurate decline in business activity and fair value.

Sources tell us that the Department of Justice is under pressure to pursue criminal charges against bank executives, as political interest mounts in holding individuals accountable for the financial crisis. We wouldn’t be surprised to see this inquiry broaden, and note that UBS said earlier this month that the department had begun an inquiry into transactions in the bank’s 2005-07 mortgage-securities business. In addition to RBS and JPMorgan, we see Morgan Stanley, Credit Suisse, Bank of America, and Goldman as most at risk, as they, or their predecessor firms, were the top pre-crisis underwriters of mortgage-backed securities.

While we don’t expect any charges to result in additional fines, we continue to expect RBS to face significant settlements related to its pre-crisis mortgage activities. We’re anticipating a $3.9 billion settlement with the Federal Housing Finance Agency and a $3 billion settlement with the Justice Department, which will be partially offset by the bank’s £2.4 billion provision for litigation.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
NatWest Group PLC349.71 GBX-0.62Rating

About Author

Erin Davis  is a senior banking analyst for Morningstar.

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