Royal Bank of Scotland RBS 2.17% is—finally—investible once more. Late on Wednesday it reached a $4.9 billion settlement in principle with U.S. prosecutors over crisis-era mortgage bond sales, one of the last banks to do so.
That settlement means that the bank that took the U.K.’s largest bailout in the financial crisis now has clarity on the last big threat to its capital. It leaves it likely to pay its first dividend in a decade once it gets to the end of 2018. The shares leapt 6% at the open on Thursday.
It also raises the prospect that RBS can make more generous capital returns in 2019 and beyond. After a long, difficult, and at times badly-managed restructuring, RBS has shrunk from one of the world’s biggest universal banks on the eve of the crisis to a vastly more modest and simple retail and commercial bank focused on the U.K.
Bottom line: it is getting closer to emulating its local peer, Lloyds Banking Group, whose strong cash returns have made it popular among U.S. and British investors.
Most of the mortgage bond penalty was already covered by provisions, so RBS will take only a £1.1 billion ($1.49 billion) charge, much less than many analysts expected. The bank has also specified the remaining costs it faces in shoring up its pension fund and completing the final bits of restructuring and investment it needs over the next two years.
These known costs and its continuing balance sheet reduction will likely leave RBS with more than £2.5 billion in excess capital at the end of 2018—and that is before any profit it makes for the year, which could be in the region of £4 billion.
The U.K. government still owns 71% of RBS and has signaled it will start selling before April 2019, the start of the next U.K. tax year. That overhang and the broad risks attached to Britain’s exit from Europe will keep some investors away and hold down the price for now, but for long-suffering existing shareholders there are finally big rewards on the way.
Write to Paul J. Davies at paul.davies@wsj.com