Edinburgh, U.K. based The Royal Bank of Scotland Group plc (RBS) recently settled a U.S. lawsuit for $275 million (£164 million). The bank was charged of misguiding investors in mortgage-backed securities (MBS) during the financial crisis. However, the agreement requires the approval of the federal judge in New York.
Royal Bank of Scotland has enough provisions for this settlement. In first half of 2013, the nationalized bank made provisions of £385 million to address litigation costs. Further, last month the bank announced that it would set aside nearly £3 billion for impending litigation claims related to mortgage-backed securities, which were sold before the financial crisis in the U.S, and other legal costs.
The Probe
Back in 2008, New Jersey Carpenters Health Fund and the Boilermaker Blacksmith Pension Trust filed a lawsuit alleging Royal Bank of Scotland of selling MBS of compromised quality.
The plaintiffs accused Royal Bank of Scotland for the breach of U.S. securities law while the later issued around $25.39 billion MBS in 2006 and 2007. These securities were included in the 14 offerings of MBS related to the Harborview Mortgage Loan Trusts. Notably, all the offerings will be accounted for in the latest settlement.
Royal Bank of Scotland is alleged to have concealed the risks involved in these investments as such securities were sold without meeting the required underwriting guidelines. Gradually, these MBS plunged to a junk status, leaving investors suffering losses.
Royal Bank of Scotland is combating several litigation issues related to MBS. The latest lawsuit settlement is part of more than $15 billion of the issued MBS that are the subject to claims against the bank. Further, the company had earlier hinted that its pending cases relate to $91 billion of MBS that were issued mainly between 2005 and 2007.
The settlement amount was too nominal to affect the stock price of Royal Bank of Scotland.
In Conclusion
Though the settlement marked the third-largest class action settlement in the U.S. against banks related to MBS sold during the subprime mortgage crisis, it reduces the existing litigation burden of Royal Bank of Scotland owing to MBS.
Royal Bank of Scotland currently carries a Zacks Rank #2 (Buy).
Some foreign banks worth considering include South Korea based Shinhan Financial Group Company Ltd. (SHG), India based HDFC Bank Ltd. (HDB) and Japan’s Mitsubishi UFJ Financial Group, Inc. (MTU). Shinhan Financial carries a Zacks Rank #1 (Strong Buy) while both HDFC Bank and Mitsubishi hold the same rank as Royal Bank of Scotland.
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