Royal Bank of Scotland Charged by Lloyds - Analyst Blog

The Royal Bank of Scotland Group plc's RBS legal hassles aggravates as Lloyds Banking Group plc LYG gets involved in a class-action lawsuit against the company, according to a report by Reuters. Lloyds Banking Group is set to claim £420 million ($709 million) owing to The Royal Bank of Scotland's management of manipulated rights issue worth £12 billion.

Lloyds Banking Group, the government backed financial institution, is taking legal action through nine of its pensions and investment management subsidiaries including Scottish Widows Plc, Scottish Widows Unit Fund Ltd, Pensions Management Ltd and Clerical Medical Investments Group. Additionally, 40,000 individual and institutional investors stand as plaintiffs.

Notably, Royal Bank of Scotland, 80% of  which is currently owned by the British government, has already been sued in an extraordinary group action lawsuit in which hundreds of investors joined recently and claim compensation of around £4 billion. It accuses Royal Bank of Scotland of misguiding investors during emergency rights issue in 2008.

The Issue

During the financial crisis, the former CEO of Royal Bank of Scotland – Fred Goodwin – along with other top management executives authorized emergency rights issue in 2008 in order to raise £12 billion for bolstering the reduced capital levels. Notably, the company's capital position deteriorated owing to the acquisition of a certain unit of ABN Amro business and a significant loss on U.S. credit market assets.

Also, under Goodwin's leadership, Royal Bank of Scotland expanded recklessly in the global markets. In the wake of the financial crisis, the company reached the verge of bankruptcy that led shareholders to incur loss of about 80% of their investments.

Investors accuse Royal Bank of Scotland of concealing its actual capital position and stated that it had faulty risk management and control measures. Also, it alleges that the company did not disclose the weak status of the transition process with ABN Amro business.

In Conclusion

Though the Royal Bank of Scotland denies accusations on it former directors, nothing can be said with certainty until the matter is resolved.

Recently, trading of the shares under the emergency rights issue marked the six-year anniversary. This raises concerns for the investors that they may no more be eligible for compensation under British law.

Royal Bank of Scotland currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the foreign banks space include Australia & New Zealand Banking Group Limited (ANZBY) and Brazilian bank Banco Bradesco S.A. BBD Both the stocks carry a Zacks Rank #1 (Strong Buy).