2 Pieces of News Hint at What's Next for Lloyds Banking Group and Royal Bank of Scotland Group

New developments keep coming for two of the world's most important financial institutions.

Jun 5, 2014 at 6:00AM

Like many financial institutions around the world, British banks were hit hard by the financial crisis, and both Lloyds Banking Group (NYSE:LYG) and Royal Bank of Scotland Group (NYSE:RBS) remain at least partially state-owned today. 

With ownership and operations restructuring under way at both banks, it's time to look at some of the latest developments from across the pond.

Share sale or computer error
Widespread use of computing technology today means errors will happen somewhere along the line, and Lloyds shares were temporarily shaken by such an error last week.

The British government today owns about 25% of Lloyds, but hopes to wind down its stake in time for the 2015 elections. The sales must take place over time since selling all the stock at once would flood the market and cause the share price to collapse. Unfortunately, the government accidentally put this theory to the test as the Treasury website issued a release announcing plans to sell 4 billion pounds' worth of shares.

The error temporarily shook the market, but shares recovered after the Treasury noted the release was in error and that it did not plan to sell the shares. Still, this unintentionally shows hows the market-moving power behind large share sales and remains something for investors to watch out for. 

Even with the planned series of smaller sales of the government's stake, Lloyds shares will still face a greater-than-normal selling pressure as the stake is sold. For most of the year, Lloyds share value has been held near $5, possibly over concerns such as stock sales and upcoming bank stress tests.

Although I do not advocate trying to time the market, waiting for the government sales to finish before buying Lloyds shares is an attractive option, considering how it worked out for shareholders of American International Group (NYSE:AIG). As the government sold its shares, selling pressure kept AIG stock value in the high $20s to low $30s ranges.

However, once this selling pressure was removed and investors could buy shares without partial government ownership of the company, shares quickly moved into the $40 range and into the mid-$50 range today. For those who are bullish on Lloyds, another option would be to buy part of a stake today and the rest after the last of the government shares are sold.

Irish retreat
Ireland was one of the countries hardest hit by the financial crisis, as the bursting of the real estate and mortgage bubble threatened the banking system and destabilized the economy. Reuters reported last week that the Royal Bank of Scotland is finally looking to reduce its Irish presence after spending 15.3 billion pounds to keep the operations of Ulster Bank going.

Following the departure or collapse of many institutions, two pillar banks control a large part of the Irish banking industry. RBS has looked to have Ulster Bank merge with an existing bank or have an Irish bank take a stake in Ulster Bank to dilute RBS' ownership.

This situation is yet another reminder of the politics surrounding RBS, as some of the pressure to reduce its Ulster Bank stake comes from a desire to return part of its 45.5-billion pound bailout package from the British government. With the government holding an 81% stake in the bank, RBS is a ways off from complete reprivatization and still subject to the demands of its majority owner.

Although betting on a recovery in Ireland looks like an attractive contrarian play, RBS needs capital at home more than it needs ownership of Ulster Bank. European bank stress tests are coming up to determine which banks will need to raise additional capital. Even if RBS does not require additional capital, funds from a sale could be used to make a small dent in the government bailout.

The takeaway
Last week was an interesting one for Lloyds Banking Group and Royal Bank of Scotland Group, as the former's share price was a temporary victim of a computer error and the latter moved to reduce its Irish operations.

With the United Kingdom still a major financial power, it's important to keep up with the latest developments of its largest banks and their quest to return to full private ownership.

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Alexander MacLennan is long American International Group warrants. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: long January 2016 $30 calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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