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420 Million Reasons Why Royal Bank of Scotland Group plc Is A Conviction Sell

In this article I am looking at why escalating courtroom woes continue to undermine Royal Bank of Scotland‘s (LSE: RBS) (NYSE: RBS.US) already-shaky investment case.

Lloyds adds to legal troubles

Royal Bank of Scotland cheered investors this month with news that pre-tax profit almost doubled during January-March, to £1.6bn, the result of significantly lower impairments and tighter cost controls.

But hardly a week goes by without a fresh legal issue putting the dampeners on any good news, and in recent days stories emerged that Lloyds Banking Group is seeking damages of £420m related to RBS’  rights issue back in 2008, adding to the multitude of courtroom woes the Scottish institution already faces.

The Herald Scotland newspaper reported that through nine of its pension and investment management divisions, Lloyds was rbsseeking compensation over claims that RBS misrepresented details of its financial health just prior to the bank’s bailout.The total value of claims from the tens of thousands of private investors and institutions which bulked up their holdings in the wake of RBS’ £12bn cash call now stands at close to £4.5bn.

But this is not the only legacy issue to have hit Royal Bank of Scotland in recent weeks. In April, Hong Kong’s Securities and Futures Commission fined the bank £450,000 due to a failure of internal controls which allowed a rogue trader to conceal approximate losses of £20m back in 2011.

RBS is of course also being dragged through the mud over allegations of mis-selling payment protection insurance (PPI) and interest rate hedging products (IRHP). The firm advised earlier this month that it accrued no additional charges for potential claims during the first quarter, and that cumulative charges for PPI and IRHP presently stand at £3.1bn and £1.3bn respectively. However, with thousands of cases still to be resolved these figures could be set to head north once again.

Royal Bank of Scotland has been forced to swallow hundreds of millions of pounds worth of settlements related to the manipulation of Libor and Euribor in recent times. But with a variety of legal battles still swirling around, the embattled bank is in severe danger of being forced to shell out more significant sums in the coming months and years.

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Royston does not own shares in any of the companies mentioned in this article.