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 youve been following RBS youll 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.
Dont 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
Its 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 banks profits are not mutually exclusive but rather a market reality.
Heres the kicker though Royal Bank of Scotland isnt 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 thats happened Im 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 didnt 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 its cutting its target price for the lender.
The banks also getting unwelcome attention from the credit ratings agencies. Earlier this year Moodys downgraded the bank. Moodys 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 its competing for executives as if it were performing a great deal better than it is. It also hasnt 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.
