Shareholders Should Not be Concerned by RBS Allegations say Analysts

If evidence of wrongdoing by top management surfaces at RBS, analysts expect considerable reputational damage and a commensurate decline in business activity and fair value

Erin Davis 18 November, 2015 | 7:57AM
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We’re not yet concerned by reports that emerged yesterday that the U.S. Department of Justice is pursuing criminal cases against executives at JPMorgan Chase and Royal Bank of Scotland (RBS) for allegedly misrepresenting the quality of mortgage securities, as we think that the probes are targeting individuals rather than the firms themselves.

We therefore think that any charges, if eventually filed, would be unlikely to result in material additional fines for the banks. We don’t expect a replay of BNP Paribas’ $9 billion fine for sanctions violations in 2014, for example, as those charges were filed against the firm, not individuals, and the fine was especially large to reflect BNP’s lack of cooperation with the investigation. We also don’t expect any wider fallout, such as either bank's license being in jeopardy or the firms risking being labelled criminal enterprises, as these potential repercussions, too, relate to firm-level, not individual-level, criminal charges. We plan to maintain our fair value estimates of £3.90 for RBS.

At this point, we have no reason to suspect that current C-level executives at either of these banks will be accused of criminal activities. However, if evidence of wrongdoing by top management surfaces, we’d expect considerable reputational damage and a commensurate decline in business activity and fair value.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
NatWest Group PLC232.80 GBX-0.34Rating

About Author

Erin Davis  is a senior banking analyst for Morningstar.