Whenever you make an investment, you are placing a huge amount of trust in the company’s management. So it’s key that management, and the company as a whole, demonstrate that they can be trusted without misleading investors. Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) has a history of misleading investors but up until last week, many analysts and investors alike had started to believe that the company was changing for the better.
Unfortunately, RBS showed once again last week that it can’t be trusted after the bank revealed that it had made a major error in its reported capital strength in the recent European stress tests.
Major error
RBS announced at the end of last week that it had incorrectly calculated its core tier one ratio, under the simulated European Banking Authority’s three-year period of stress. The original figures suggested that the bank’s tier one ratio would fall to 6.7% by 2016, in an adverse situation.
At the time, these figures surprised many City analysts. The numbers suggested that RBS had a stronger balance sheet than peer Lloyds (LSE: LLOY) (NYSE: LYG.US) despite Lloyds’ recovery. Lloyds passed the European Banking Authority’s test with a stressed ratio of 6.2%, the lowest of all the major UK banks. The pass rate was a ratio of greater than 5.5%.
After recalculating its figures, RBS revealed that its stressed capital ratio was in fact 5.7%, not the previously stated 6.7% — a huge miscalculation.
The fact that RBS made such a huge miscalculation has caused concern among officials. The bank has now been ordered by regulators to bring in its auditors and re-examine the figures, to ensure that this mistake does not happen again.
On the other hand, Lloyds’ reputation has improved slightly from this revelation. For example, Lloyds is no longer at the bottom of the pile when it comes to the bank’s capital position. That being said, the bank is not out of the woods yet, the group is still facing a class action-style lawsuit from more than 5,000 investors who are claiming they lost about £400m in the government-arranged Lloyds takeover of HBOS six years ago.
Too little too late
RBS’s auditors will be able to correct the figures but damage to the bank’s reputation has already been done.
Indeed, this is yet another mistake from RBS that has made the bank appear amateurish, with little control over its own operations. It has also emerged over the past month that RBS’s senior managers gave misleading evidence to MPs over allegations the group’s restructuring unit profited from distressed companies it was meant to help.
The Financial Conduct Authority is investigating RBS’s restructuring unit over its treatment of small companies. Evidence suggests that the unit was run as a profit centre, pushing small companies out of business in order to profit from their troubles.
Additionally, the bank has been fined for an IT systems meltdown in 2012 that locked millions of customers out of their accounts within the past week. The FCA fined the bank £42m for this issue while the Prudential Regulation Authority issued a £14m fine.
