The Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) is an international banking and financial services company which provides a wide range of services to commercial, personal, and corporate customers through its principal subsidiaries. Recently, RBS received significant attention due to the lawsuits by investors targeted at the company. The share price of the company has declined as a result.
RBS is facing two major issues that are causing a continuous decline in its financial performance. These are lawsuits due to its inappropriate actions, and the high costs of its operations. The company has been trying to address these issues efficiently; however, these issues have had a detrimental impact on the company's profitability. Due to these issues, the annual losses of RBS increased from $3.03 billion in the previous year to $9.05 billion in 2012.
RBS was bailed out by the British Government after the financial crisis in 2008, and since the bailout, RBS has reported consecutive annual losses. In an attempt to mitigate its financial losses and to achieve cost-effectiveness, RBS has already cut 36,000 jobs and the company plans to cut another 3,800 in the near future. One of the reasons behind the company's high costs has been revealed as the excessively high salaries paid to executives. The bank pays a significantly high amount of salaries to chosen executives and those amounts have a material influence on the bank's financial performance. RBS has been following a recovery plan, which is in its last year. It is expected that the bank will deliver better financial results in the prospective earnings disclosure. Currently, the British Government holds more than 80% stake in the bank; however, it has been disclosed that the shares will be sold in the upcoming years.
RBS and Competitors
The major competitors of RBS are Barclays PLC (NYSE:BCS), and HSBC Holdings plc (HBC). Barclays is the direct competitor to RBS because both banks operate in the same territories and offer similar services. Unlike RBS, Barclays is not held by government authorities and its financial performance is relatively better than that of RBS. For the year 2012, Barclays declared a net loss margin of 0.95%, which is significantly lower than RBS's net loss margin of 31.4% for the same period.
HSBC Holdings plc is a banking and financial services organization with a number of services overlapping those of RBS. HSBC operates in six geographical regions i.e. Europe, Hong Kong, Asia-Pacific, Middle East and North Africa, North America and Latin America. Similar to RBS, HSBC has global operations and it services commercial, individual, and corporate customers. For the financial year 2012, HSBC reported a net profit margin of 20.28% which is significantly better than both RBS and Barclays.
RBS's Market Performance
The market performance of RBS has been highly volatile over the past months; however, the average trend of the share price for most of the last year was upwards. The trend of the share price has started moving downwards since January when the company came under pressure from a fresh round of lawsuits. At the time of this edition, the share price of the company was within the range of $8.98 and $9.16, while the 52 week range of the share price was between $6.01 and $11.84. The difference between the two extremes represents the extent of rise and fall in the share price over the past year. The following chart represents the share price of the company over the past year.
The chart shows that the share price has remained volatile for most of the year with an incline from September 2012 till January 2013, and a decline since then. The share price in the recent past has shown signs of recovery and it can be expected that the share price will rise in the foreseeable future. However, the extent of recovery cannot be determined with certainty, therefore, making an investment decision based on the recent recovery may not be feasible.
After an analysis of the relevant factors, in my opinion, investors should hold the shares of the company. I believe that the company's share price has declined as a result of uncertainty emerging from lawsuits. However, the share price has started to recover and it can be expected that the value of shares might increase in the foreseeable future. Buying the shares may not be a feasible decision as the situation for prospective financial performance is not yet clear and the trend of share price has been highly volatile.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.