Anxiety can be seen building up among Royal Bank of Scotland Group PLC (NYSE:RBS) shareholders after the US Department of Justice asked Deutsche Bank AG (USA) (NYSE:DB) to pay $14 billion to settle charges relating to sale of toxic mortgage debts. RBS is facing similar charges as Deutsche Bank in the matter of sour debt investments.
Royal Bank of Scotland Group PLC (NYSE:RBS) stock has trended lower following the shocking $14 billion settlement asked for by the DoJ from Deutsche Bank. Investors are worried that DoJ could ask RBS for a similarly large settlement. If that happens, RBS dividends would be in jeopardy.
The trend in which DoJ is making request for huge settlement amounts is worrying investors. Though Deutsche Bank may pay less than the $14 billion settlement sought by DoJ, the sheer size of the settlement alone means that RBS would be in trouble if its own settlement were to request similar amount.
It is unlikely that Royal Bank of Scotland Group PLC (NYSE:RBS) has set aside a reserve to cover such large amount of settlement. As such, if the company were to face a settlement request in the vicinity of $14 billion, it would mean delayed resumption of dividend payment at the company. Additionally, it would mean that RBS’s return to private ownership would be a prolonged and painful journey.
The government stepped in to rescue RBS about eight years ago. If DoJ were to hit the company with a hefty settlement bill like it has done to Deutsche Bank, it would mean that RBS could have to spend more years trying to repay its government loan.
Poor show in stress test
Royal Bank of Scotland Group PLC (NYSE:RBS) is not in great shape. The company’s stress-test performance wasn’t impressive as it emerged among the worst performers. That further highlights the risk in and vulnerability of the company.
Given the environment of increased uncertainty, investors can be seen looking for the exit in Royal Bank of Scotland Group PLC (NYSE:RBS). Investors will be moving to the sidelines until the settlement overhang clears and RBS demonstrate ability to return to dividend payments and to private ownership.