RBS Hit By LIBOR Fixing Investigation & Ulster Bank Glitch

July 5th, 2012 by Trefis Team
RBS: Royal Bank of Scotland Group logo
RBS
Royal Bank of Scotland Group

The Royal Bank of Scotland Group (NYSE:RBS) has been in troubled waters this fortnight over its alleged involvement in the LIBOR fixing scandal as well as for the wide-scale disruption in services of its Ulster Bank business due to a technical glitch. The 82% state-owned banking group is rumored to be the next victim of the ongoing LIBOR manipulation investigation which cost competitor Barclays (NYSE:BCS) the jobs of its Chairman Marcus Agius, CEO Bob Diamond and COO Jerry del Missier besides $451 million in fines (see Barclays Paying $451 Million in LIBOR-Fixing Case, Who’s Next?).

We have a $8.70 price estimate for RBS’s stock, around 25% ahead of its current market price – which is the effect of the significant bias against the European banks among investors as a result of the deteriorating debt situation in the region combined with the turmoil the bank has been going through recently over the two issues mentioned above.

See our full analysis for RBS here

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The LIBOR Scandal May Cost RBS Millions

RBS is among 16 banks currently under investigation by U.K. and U.S. regulators for artificially keeping the benchmark LIBOR low during the global economic crisis of 2008 by downplaying borrowing rates. The fact that the LIBOR and its European counterpart, the EURIBOR, are managed by the British Bankers’ Association (BBA) has forced the British government to take a keen interest in the matter. And with the government being the biggest shareholder in RBS, things appear all the more problematic as the government would likely end up taking stricter action against the bank if the investigation links it to the scandal in any way.

Reports currently suggest that RBS could face a fine north of £150 million ($230 million) – something which will be reflected as a significant increase in its non-interest expenses for the year. [1]

And Ulster Bank Continues To Hurt The Group

Two weeks ago, customers of the group’s Ulster Bank business – a prominent bank in Ireland – started facing serious problems with their banking accounts. A technical glitch in Ulster Bank’s system resulted in loss of access for almost all of the bank’s 100,000+ customers, who could not access their money or make payments. [2]

The bank has been frantically working at clearing the backlog of transactions accumulated since the glitch was discovered. And the efforts will continue for a while as a recent statement mentions that it would take another two weeks for the issue to be fully resolved. [3]

The incident is expected to add an additional expense burden on the already poorly performing Ulster Bank as RBS is likely to compensate customers who were directly impacted by this issue. [4] Notably, Ulster Bank has been dragging down the performance of the RBS Group as a whole for several quarters now with impairments in its loan portfolio responsible for a disproportionately huge chunk of the group’s total impairments.

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Notes:
  1. RBS facing hefty fine as Libor scandal spreads: report, Reuters, Jun 29 2012 [↩]
  2. Response to technical problem, RBS Press Release, Jun 21 2012 [↩]
  3. Update for Ulster Bank customers on technical issues, RBS Press Releases, Jul 4 2012 [↩]
  4. Ulster Bank to compensate customers over technical breakdown, RTE News, Jul 5 2012 [↩]