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Royal Bank of Scotland to settle on US mortgages within Weeks

Royal Bank of Scotland (RBS.L) could reach a settlement within weeks on claims it misled investors in selling U.S. mortgage-backed securities, passing another milestone in its recovery from the financial crisis, analysts said on Friday.

a woman under a umbrella walks past a RBS branch on a London high street 

U.S. authorities struck a $5.1 billion (4 billion pounds) settlement with Goldman Sachs (GS.N) on Thursday, leaving British taxpayer-backed RBS as the only other major case involving mis-sold U.S. mortgage-backed bonds still to be resolved.

Court documents filed in the United States in June suggested RBS could have to pay as much as $13 billion to settle the mortgage-backed securities claims, although some analysts' estimates are much lower.

Analysts expect U.S. regulators will be keen to wrap up the case well before U.S. presidential election campaigning begins in earnest.

"RBS is next in line and we would expect a settlement very soon," Chirantan Barua, analyst at Bernstein Research, said.

"These are things from the last crisis and we are already into the next one ... I feel the U.S. regulators want things done before the end of Obama's presidency, maybe even before the primaries start," he said, referring to votes held to choose candidates for the U.S. presidential race, which begin next month.

The U.S. Department of Justice declined to comment.

Although costly, investors and analysts say a settlement would be a major step in RBS's recovery from financial crisis in 2007-2009, when it was rescued with a 46 billion pound ($65.75 billion) government bailout. The British government still holds a 73 percent stake.

RBS has so far set aside 1.9 billion pounds ($2.7 bln) to deal with the claims.

"This is the final step before RBS resumes dividends and potentially returns excess capital. It resolves the biggest tail risk for the bank," Barua said.

RBS's Chief Executive Ross McEwan [ pictured below ] told reporters on a third-quarter earnings call in October that the bank wanted to get the mortgage issue dealt with, but the timing was really in the hands of the United States.

The U.S. investigation into RBS has focused on allegations it misled some investors in securities backed by residential mortgages during the financial crisis.

These are bonds backed by home loans that are packaged up and sold to investors. The process, known as securitisation, is used by banks to help to finance mortgage lending.

"After the Goldman settlement, and as time moves on, you would assume that an RBS settlement would be imminent," Alex Potter, banking analyst at Mirabaud Securities said. "RBS are keen to get on with it because it's the last big regulatory uncertainty for the bank."

The U.S. Department of Justice and state officials have already struck settlements with several U.S. banks including JP Morgan (JPM.N), Bank of America (BAC.N) and Citigroup (C.N) over the sale of mortgage-backed securities.

The Goldman settlement is at the lower end of previous penalties. Bank of America reached a $16.65 billion settlement in 2014 while JP Morgan settled for $13 billion in 2013.

Bernstein estimated RBS could face fines of $7.5 billion from the U.S. Department of Justice and other agencies, but said it could be as high as $13 billion in a worst case scenario.

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