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Is Confidence in RBS Shares Being Restored?

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Royal Bank of Scotland (LSE:RBS) shares were on the upswing today, 27 June 2012, after losing ground daily since 22 June when a “computer glitch” brought the bank to its operational knees along with subsidiaries, NatWest and Ulster Bank.  RBS share price plunged from 243.20 on 22 June to 227.70 on 26 June.  The Bank has yet to release a clear causal picture, but shareholder confidence appears to be being restored upon the announcement that the problem was been largely resolved.  Share price rose, albeit modestly, for the first time in a week, reaching 232.60 shortly after 10:00 a.m. UCT.

What Went Wrong?

Whilst RBS has left it unclear as to the root cause of the problem, it is clear that the bank’s computer system failed to log deposits and withdrawals for several days including and subsequent to 22 June, freezing the accounts of 17 million customers.  Customers were unable to check balances, withdraw wages, or pay bills.   Although the bank announced that the problem had been resolved on Friday, the resolution reference was to ascertaining and repairing the specific programming problem.  It did not mean that the more than 100 million transactions affected by the root problem have been corrected.  That correction will require an abundance of tedious data re-entry that could take up to several weeks.

Who’s To Blame?

Following catastrophes of this nature, everyone wants to know who’s to blame, and speculation runs rampant.  Some reports are suggesting that it is CA Technologies’ CA-7 batch processing software that is to blame.  Adherents of that perspective are speculating that RBS will file suit against CA to recover damages which could exceed £100 million.

Others are claiming that it was not a computer glitch, but an operator error, blaming an outsourced, junior technician for wiping out data during a routine software upgrade procedure.  RBS CEO Stephen Hester is deflecting that speculation, saying that “The IT centre in Edinburgh is our main centre; it is nothing to do with (sic) overseas.  Things go wrong.”  What he failed to say was that much of the operations processed at the Edinburgh IT centre are handled from India and that the error that was generated from work done in Hyderabad, India.

An unidentified RBS spokesperson clarified, saying, “The software error occurred in Edinburgh, the team controlling the software are (sic) base in Edinburgh, and the recovery is being managed in Edinburgh.”  Mr. Hester has taken the high road, side-stepping a witch-hunt with a “the buck stops here” approach.

What’s the Upshot?

Other than the obvious discontent on behalf of customers and shareholders at the apparent ineptitude of the bank, there will be additional fallout from this incident.  The repair and overtime costs alone could cost the company tens of millions of pounds.  Stephen Hester noted that reductions in senior bonuses are likely, a smart political move during a period when executive bonuses are under severe criticism, but, nonetheless it is a penalty imposed on people not directly responsible for the mishap.

Sir Mervyn King, Governor of the Bank of England suggested that questions needed to be asked and answered about why the problem has taken so long to resolve.  He called upon the Financial Services Authority to investigate.  The FSA said that it wants “a complete account of the issues” and a corrective action report once the matter is resolved.

David Fleming, National Officer at Unite, the union that represents RS employees, is indicating some potential confrontation, reminding the public that “it is the workforce at Royal Bank of Scotland who are (sic) working around the clock.  Yet RBS management has slashed 30,000 staff, imposed a pay cut, and decimated the pensions of those dedicated staff.  Unite will demand answers as to why staffing levels are being cut at a time of considerable problems within the bank.”

In another politically brilliant move, RBS has removed its hospitality venue for the remainder of the fortnight of Wimbledon.  The bank said, “Under the circumstances, we felt it would be inappropriate to provide client hospitality at Wimbledon.  Our people are focused on resuming normal service for our customers as soon as possible.”

The fallout for the bank in terms of lost customers and shareholder confidence remains to be seen.  Whilst the increase in share price today indicates the possibility of restoration, the fact that the process of resolving the chaos could be protracted and that it will continue to be in the news may not be a good omen.

Company Spotlight

The Royal Bank of Scotland Group is a banking and insurance holding company based in Edinburgh.  The RBS Group operates a variety of banking brands in the business banking, private banking, insurance, and corporate finance industries in North America, Europe, and Asia.  The main subsidiaries of the RBS Group include The Royal Bank of Scotland, National Westminster Bank, Ulster Bank, Drummonds, Coutts & Co. and Citizens Financial Group. In the insurance industry, RBS group owns Churchill Insurance, Direct Line, Privilege, and NIG.

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