Moody’s Upgrades RBS: An Indicator of the U.S. Department of Justice’s Forthcoming Decision?

In this post, the focus will be on the recent decision by Moody’s to upgrade RBS’ credit rating, citing their ability to withstand future penalties for financial crisis-era transgressions. With RBS having been covered on a number of occasions here in Financial Regulation Matters, this post will take a different view of the Bank and look at the pending future it has. The question stemming from the recent upgrade is whether it indicates that the settlement with the U.S. Department of Justice (DoJ) will be as the bank expects, which is what Moody’s believe, or whether it will be much more, with the likely result being an incredible blow to the Bank’s attempted recovery.

RBS was central in the Financial Crisis, and this is confirmed by the number of penalties and settlements it is facing. There were arguably three remaining hurdles in this sense up until recently (it has already faced and paid a number of fines since the Crisis), with one of those hurdles falling by way of the agreed settlement with investors who were fraudulently led into investing in the Bank in 2008. Yet, it seems as if the 82p per share paid to those investors will pale in comparison with what is coming. Only last week was it reported that the Bank is in advanced settlement talks with the Federal Housing Finance Agency in the U.S., which is concerned with the mis-selling of mortgages to Fannie Mae and Freddie Mac. The news report suggests that the settlement will be around $4.5 billion, although there are fears that this could be much higher. Yet, the biggest penalty on the horizon comes from the DoJ, with reports suggesting that RBS investors would actually be happy if the fine was around $10 billion, which would suggest the penalty will be much higher; it has been suggested that the Bank has put aside around $6 billion for future penalties, but the fears surrounding the DoJ’s decision, together with its recent punishment of Deutsche Bank for just over $7 billion, could lead one to suggest that $6 billion may not be enough, given how entrenched RBS were in the scandal. However, all of this uncertainty, something which is massively frowned upon in the capital markets, has not stopped Moody’s from increasing the Bank’s rating.

With regards to the rating agency’s assessment of the bank’s long-term creditworthiness, the agency has increased the rating to Baa3 – its lowest investment grade – stating that the increase reflected the bank’s ‘strong capital and litigation reserves levels’. The agency also suggested that the bank now has ‘sustainable earnings from core retail and corporate businesses’ which would offset any pressure emanating from Brexit. It should come as no surprise that the Bank is overjoyed with this new rating, but there are a number of factors which would suggest that the rating is, perhaps, premature. Whilst there are educated guesses as to the amount that will be owed after settling with two of the U.S. agencies pursuing the bank, it is difficult to state with any certainty whether the DoJ will agree with the $10 billion being quoted beforehand. Also, as reported recently, the Bank is still facing up to thirty other penalties and settlements, with just one being the ramifications of the now defunct ‘Global Restructuring Group’, for which the bank has, reportedly, already set aside £400 million to cover those costs. With all this in mind, it is difficult to say with any certainty whether the bank is currently ‘investable’.

Ultimately, this current gap in between the rating assessment and the revealing of future events is the raison d’être of the rating agencies. Yet, as we have spoken about on a number of occasions, the rating agencies have suffered great damage to their reputation so it will be interesting to see whether investors pay attention to this particular rating change; usually, investors will, but the difference here is that the future facing RBS is particularly bleak – will investors trust their money to the ‘opinion’ of a rating agency irrespective of the mounting evidence that says RBS is far from the edge of the woods? However, Moody’s rating could indicate the opposite – it may be the case that the agency has reason to be confident that the DoJ will go easy on RBS, which will be good for the bank but negative in terms of establishing effective deterrents. In related news, the DoJ is slightly behind with regards to RBS, as the dismissal of Attorney General Sally Yates in January, followed by the appointment of Jeff Sessions, resulted in a delay in proceedings, whilst further amendments to the way in which settlements are distributed – Obama championed distributing settlement proceeds amongst victims and also community groups, whilst Trump favours distributing them amongst victims only – are also holding the RBS case up. In that sense there is a potential that RBS will profit greatly from the Trump Administration and the re-establishment of neo-liberalism in America which, when we consider just how central RBS were and how they have continued to transgress after the Crisis, would be a really depressing reality to bear witness to; hopefully, the DoJ makes an example out of RBS, although the best example would be to put the leading members of the 2007/8 RBS board on trial. It is likely the other end of that scale will be seen, however.