What Management Would Prefer You Didn’t Know About Royal Bank of Scotland Group plc


Today I want to talk about the Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) and how its culture is hurting its bottom line.

Billions down the drain

If you’ve been following RBS you’ll know that the bank slumped to a £5.2bn loss last year, due in no small part to a £4.6bn charge on its own debt. All up, RBS has generated up to £36bn in losses since it was bailed out by taxpayers in 2008.

Don’t feel too sorry for the dear old bank — despite being more than 80% owned by British taxpayers, it paid around £600m in bonuses last year, with its investment bankers receiving £215 million.

RBS coughs up millions for rogue traders

It’s basically up to the government to reign in this sort of spending. One action it took boggles the mind. The government took back a portion of the bonuses paid to those involved in the Libor rate-rigging scandal. How these blokes even had a bonus owed to them is a mystery to me.

The justification

RBS chairman Sir Philip Hampton says he has his hands tied. He argues that these bonuses and the bank’s profits are not mutually exclusive but rather a market reality.

Here’s the kicker though — Royal Bank of Scotland isn’t competing effectively with the other banks at a really core level, yet it insists on paying executives as if it is. Its net interest margin for the past three years, for example, consistently rated in the bottom three of its peers.

Overall income for the group could also be limited in the coming months, as The Guardian recently reported that The Council of Mortgage Lenders said its latest figures added to evidence of a “plateau” for mortgage lending.

The hits keep coming

Despite everything that’s happened I’m still not satisfied that RBS has cleaned up its culture either. The Herald Scotland recently reported that RBS had failed to overturn a Court of Session verdict that it misrepresented a land valuation.

According to the report, it did so in order to secure a £300,000 personal guarantee from two property developers. This bank should be building trust and yet it continues to receive negative press.

The impact

I suspect management would prefer you didn’t know that City analysts are running out of patience with RBS. Of the two dozen or so covering the stock, all have lowered their 12 month price target for the bank to around £3.50.  As recently as this week, Citigroup announced that it’s cutting its target price for the lender.

The bank’s also getting unwelcome attention from the credit ratings agencies. Earlier this year Moody’s downgraded the bank. Moody’s said it has limited financial flexibility to manage unforeseen events.

And I think that goes to the heart of my hesitation with RBS. The business has turned a corner, and we are seeing rising income with reduced impairment charges (impairment charge fell from £1.1bn in the second quarter of last year to a £93m credit for the same period this year), but it’s competing for executives as if it were performing a great deal better than it is. It also hasn’t managed to completely stamp out the rogue culture within the bank. As far as I can see this former banking giant has stalled.

There are other banks you could put your money behind that carry less risk and, I believe, have a brighter future.

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David Taylor has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.