Will Royal Bank of Scotland Group plc Really Fail Within The Next Decade?

An explosive new book called Shredded: Inside RBS, The Bank That Broke Britain, has claimed that Royal Bank of Scotland  (LSE: RBS) (NYSE: RBS.US) will fail within the next ten years.

The book, written by the financial journalist Ian Fraser, claims that RBS still has a £100bn ‘black hole’ on its balance sheet. What’s more, the book claims that this black hole is a result of “five broad areas of alleged criminality and wrongdoing”. 

Criminality and wrongdoing

Shredded’s list of specific accusations against RBS is extensive. The book claims that RBS’s management misled investors during 2008, when the bank asked investors to put up more than £12bn through a rights issue. In addition, the book claims that the bank has yet to reveal the true extent of its role in the Libor scandal and the possible manipulation of the £4trn-a-day foreign exchange markets.

What’s more, Shredded claims that RBS continue to mislead its shareholders to this day. The book describes the culture inside RBS as ‘toxic’ and claims that the bank manipulated its finances during 2012, in order to convince shareholders that the group was on the road to recovery. 

Toxic culture

Shredded concentrates on RBS’s toxic culture, which — based on the above information — is still present to this day. It is claimed that the bank frequently used shareholder cash to support the lifestyles of its top executives. These flamboyant lifestyles included the frequent use of corporate jets and Fred Goodwin’s fleet of Mercedes’, as well as extravagant buildings and decor.

What’s more, it is claimed that RBS, under Goodwin’s stewardship, overspent by billions on bolt-on acquisitions. This is something that will likely come back to haunt the bank as it continues to sell off non-core assets.

Only adding to troubles

Unfortunately, the release of Shredded comes at a time when RBS is struggling to convince its shareholders that things are getting better. Indeed, it was recently revealed that the bank has burnt through all of its bail-out cash and management has stated that it will take another five years before the bank can report any kind of recovery.  

But RBS is at risk of running out of cash before this five year period is up. Following the profit warning earlier this year, RBS’s fully loaded Basel III Core Tier One capital ratio is expected to fall between 8.1% and 8.5% by the end of the year.

A capital ratio of less than 10%, whilst above the regulatory minimum of 7%, is considered low; RBS was targeting a capital ratio of 11% by the end of this year. 

Additionally, RBS is having trouble offloading the group’s US arm, Citizens, for which it has been unable to find a buyer. The disposal of Citizens should strengthen RBS’s balance sheet but as the bank has been unable to find a buyer, management have elected to spin off Citizens through an IPO.

Unfortunately for RBS, an IPO of Citizens will leave the bank holding a share of the new independent company, not the ‘clean break’ management would prefer.