Whenever you make an investment, you are placing a huge amount of trust in the companys management. So its 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,manyanalysts and investors alike had started to believe that the company was changing for the better.
Unfortunately, RBS showed once again last week that it cant be trusted after the bank revealed that it had made amajor error in its reported capital strength in the recent European stress tests.
RBS announced at the end of last week that it hadincorrectly calculated its core tier one ratio, under the simulatedEuropean Banking Authoritys three-year period of stress. The original figures suggested that the banks 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 peerLloyds(LSE: LLOY) (NYSE: LYG.US) despite Lloyds recovery. Lloyds passed theEuropean Banking Authoritys 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 banks capital position. That being said, the bank is not out of the woods yet, the group is still facing aclass action-style lawsuit from more than 5,000 investors who areclaiming they lost about 400m in the government-arranged Lloyds takeover of HBOS six years ago.
Too little too late
RBSs auditors will be able to correct the figures but damage to the banks 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 RBSssenior managers gave misleading evidence to MPs over allegations the groups restructuring unit profited from distressed companies it was meant to help.
The Financial Conduct Authority is investigating RBSs 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 finedfor 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 thePrudential Regulation Authority issued a 14m fine.
Can’t be trusted
RBS has shown once again that it can’t be trusted and it could be time to turn your back on the bank. However, before you make any trading decisionI strongly advise that you take a closer look at RBS.
To help you conduct your own analysis, our analysts here at the Motley Fool have put together thisfree reportentitled,”The Motley Fool’s Guide To Banking“.
Thefree reportguidesyou throughsix key ‘City insider’ valuation metricsfor each bank traded in London helping you to compare banks and make the best investment.
Thereport isfreeandwithout obligation. To get your copy,click here.
Rupert Hargreaves 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.