Aug 16, 2012
Royal Bank of Scotland (NYSE:$RBS) currently is under investigation for its alleged involvement in the high profile LIBOR-rigging fraud. They have responded to this by dismissing 4 employees overtly connected. Under these gloomy shadows, the British bank, still 82% owned by the British Government released its earnings for the first half of the year last week, while talks of its outright nationalization gaining traction. The Financial Times has been the progenitor of a number of “trial balloons” quickly dismissed by regulators, such as the CFTC dropping their probe into Silver (AMEX:$SLV) manipulation or the market in the case of this RBS rumor.
The nationalization talks have crept up because British Ministry of Finance recently introduced a scheme to free up credit and want to use RBS as the vehicle for their plans to buy votes through lending to SME’s. Liberal Democrats in Parliament want to create momentum through RBS’s involvement; compelling them would then push other banks also into action. But this they cannot do without complete public control of the bank, hence buying out the 18% left in private hands.
RBS posted a net loss of £1.99 billion, or $3.09 billion for the first half of the year against £1.42 billion loss over the same period last year. The revenue for the troubled bank decline 8%, to £13.29 billion. They set aside £2.97 billion to compensate customers for a recent technology glitch and also for selling inappropriate insurance to customers, payment protection insurance (PPI). These set-asides are very real for RBS and the rest of the 16 London banks associated with LIBOR, not to mention the three U.S. banks involved as well.
Both Citigroup (NYSE:$C) and Bank of America (NYSE:$BAC) had to take big loan-loss provisions to create the illusion of profitability: $1.77 billion for B. of A. and $984 million for Citigroup. This is a common theme in all of the major banks. There is plenty of traditional banking business but not much profit in a zero-interest rate environment, so there is still a ton of risky assets on their books that need a 5 or 10 basis point massage to ensure any kind of real profit.
Despite the sluggish half year earnings, its quarterly results for June, was a bit encouraging. RBS net operating loss for the quarter dropped to £466 million, compared with £897 million for the same period in 2011. Both its core Tier 1 ratio, which reflects a bank’s creditworthiness, rose slightly to 11.1 percent and loan to deposit ratio, 104% improved during the past 12 months as well.
Segment wise, for the half year, its investment banking division experienced a fall of 29.6 percent in operating profit against £264 million for the same period last year. Owing to persistent losses RBS has increased their proposed layoffs from 3500 to 5700, mainly from markets and international banking division, these cuts in staff lowered costs by 4%.
The ongoing European debt crisis has severely damaged the banks retail and corporate banking units, however its total exposure to the troubled euro zone fell 8% to £218 billion. In the same week in which RBS reported its results, Switzerland's UBS (NYSE:$UBS) and Germany's Deutsche Bank (NYSE:$DB) also reported lower profits owing to euro zone debt crisis.
As things stand a number of the major banks will not survive the coming wave of debt deflation. It will be the central banks’ job to pick who wins and who loses. With the Brits pretty much out of the international monetary system due to having sold all of their gold (AMEX:$GLD) their banks are likely the ones to be picked off one by one while the stronger central banks of the U.S., the E.U. and Switzerland play the swap line round-robin to prop up who they can for as long as they can. If RBS is nationalized and forced to satisfy the political demands of the British Parliament’s class warfare schemes there won’t be much left in a few years to even talk about.