RBS sets aside $4 billion for 'painful legacy' of US loan mis-selling

Royal Bank of Scotland has taken a 3.1 billion pound ($3.92 billion) provision as it prepares to settle claims in the United States that it mis-sold toxic mortgage-backed securities in the run up to the 2008 financial crisis.

The provision means that state-backed RBS is unlikely to make a profit in 2016, the ninth straight year the bank has failed to make an annual profit.

RBS is preparing to start negotiations with the US Department of Justice over a settlement of the mis-selling claims, the timing of which is still uncertain.

"This bank, and of course the British taxpayers, have paid a very heavy price for the decisions that were made at RBS before the crisis," RBS Chief Executive Ross McEwan said on a conference call with reporters on Thursday.

"Today's announcement is yet another painful example of that legacy," he said.

This is the first time that RBS has set aside any money to directly cover a settlement with the US Department of Justice over the alleged decades-old mis-selling of mortgage-backed securities.

RBS is the latest European bank that needs to reach a settlement with US authorities. Credit Suisse earlier this month agreed to pay $5.3 billion and Deutsche Bank agreed to pay $7.2 billion to settle their respective mis-selling cases.

These settlements stem from an initiative launched in 2012 by former US President Barack Obama to hold Wall Street accountable for misconduct in the sale of the securities that helped to trigger the worst economic crisis since the Great Depression.

Analysts said investors would welcome the first signs of clarity over the eventual size of RBS's settlement even as the final total remains unclear.

"RBS shares are up a touch today, perhaps as investors decide that things might not be as bad as feared," Neil Wilson, senior market analyst at trading firm ETX Capital in London, said.

RBS shares were up 1.7 per cent by 0850 GMT.

Analysts have estimated the bank could have to pay the US Department of Justice as much as 9 billion pounds in the next few months. Even the lowest estimate of 2 billion pounds would make it the largest fine in the bank's history.

UBS said in a research report this week that RBS sold around 35 per cent more volume of the toxic securities than Deutsche Bank, but also said there had so far been little correlation between the volume sold and the size of a final settlement.

RBS said the total misconduct bill for mis-selling these securities might exceed its provisions.

CEO McEwan has been trying to clean up RBS's balance sheet and end an array of legal cases so the government can sell its more than 70 per cent stake in the bank after a 45.5 billion pound bailout during the financial crisis.

McEwan said the bank was unable to claw back any banker bonuses in relation to the US mortgage securities because they were sold before the financial crisis and there were no laws in place at the time that would allow RBS to recoup any of the money.

The British government has said that the uncertainty about the scale of the US penalty is one of the reasons why it halted plans to sell any further shares in the bank.

RBS said in its statement it continued to cooperate with the Department of Justice, although it remained uncertain when a settlement might be reached.