Barclays Settles U.S. Mortgage Case, Q1 Results To Take Hit

Barclays (LON:BARC) (NYSE:CS) became the latest global bank to settle a lawsuit with the U.S. Department of Justice (DOJ) related to the sale of residential mortgage backed securities (RMBS). The company, without admitting or denying any wrongdoing, has agreed to pay £1.42 billion ($2 billion) in penalties to resolve allegations over its role in the sale of subprime mortgage and the subsequent financial crisis.

The settlement, announced late last week, follows three years of probe into the accusations that Barclays led to billions of dollars of losses for investors by engaging in sale of toxic RMBS between 2005 and 2007. The investigation revolved around 36 RMBS deals concerning $31 billion worth of loans, of which more than 50% defaulted. The DOJ alleged that Barclays misrepresented the quality of loans tied to the RMBS.

Additionally, two of the company’s former executives, Paul Menefee and John Carroll have been penalized over their alleged role in the subprime mortgage crisis.

U.S. Attorney Richard Donoghue for the Eastern District of New York said, “The substantial penalty Barclays and its executives have agreed to pay is an important step in recognizing the harm that was caused to the national economy and to investors.”

Jes Staley, Barclays CEO said “I am pleased that we have been able to reach a fair and proportionate settlement with the Department of Justice. It has been a priority for this management team from the start to resolve these historic issues in a timely and appropriate manner wherever possible.”

Impact on Q1 Results

The resolution of this legacy matter is expected to go a long way in making Barclays more focused on improving profitability. However, the company’s first-quarter 2018 results will be adversely impacted by the fine.

The settlement will also have a negative impact on the bank’s Common Equity Tier 1 ratio by roughly 45 basis points.

Road Ahead

In fact, Barclays was the only bank that had pushed against the huge fine claimed by the DOJ. This had resulted in filing of the case against the company in late 2016. Nonetheless, this seems to have worked as the company is paying a significantly less fine compared with other foreign banks — Credit Suisse (NYSE:CS) and Deutsche Bank (NYSE:DB) , which paid $5.3 billion and $7.2 billion, respectively — accused of similar misconduct. Another foreign bank, Royal Bank of Scotland (LON:RBS) PLC (NYSE:RBS) , has still not settled the allegations.

For Barclays, the resolution of legacy legal matter will enable it to move forward with the plan to restore dividend to the original amount this year. Also, the company intends to initiate share repurchases.

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Staley said, “The completion of our restructuring in 2017, and putting significant legacy matters like this one behind us, mean Barclays is well positioned to produce stronger earnings going forward, and to start returning a greater proportion of those earnings to our shareholders over time. Accordingly, it remains our intention to pay a dividend of 6.5 pence for 2018.”

Further, the settlement eliminates a considerable negative factor for Barclays in the Bank of England’s annual stress test.

Over the last year, Barclays shares have gained 6.5%, underperforming the Original post

Written By: Zacks Investment Research