James MacLeod Nairn MSc Dissertation

James MacLeod-Nairn (st05002068)

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CARDIFF METROPOLITAN UNIVERSITY

A COMPARATIVE CASE STUDY, ANALYSING THE

FINANCIAL PERFORMANCE OF BARCLAYS BANK

PLC AND RBS PLC FROM 2001 TO 2014

James MacLeod-Nairn

ST05002068

MSc Finance

School of Management

Dissertation Supervisor: Professor Chris Parry

1s t/June/2015

Word Count: 17,829


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Declaration:

DECLARATION

This work is being submitted in partial fulfilment of the requirements for the degree of

………………………………………………………………………………………….and has not previously been accepted in

substance for any degree and is not being concurrently submitted in candidature for any degree.

Signed ......................................................................(candidate)

Date ..........................................................................


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Legal Statement:

STATEMENT 1

This dissertation is the result of my own work and investigations, except where otherwise stated.

Where correction services have been used, the extent and nature of the correction is clearly marked

in a footnote(s).

Other sources are acknowledged by footnotes giving explicit references. A bibliography is appended.

Signed .....................................................................(candidate)

Date .........................................................................

Either STATEMENT 2(i)

I hereby give consent for my dissertation, if accepted, to be available for photocopying and for inter-

library loan, for deposit in the University’s e -Repository, and that the title and summary may be

available to outside organisations.


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Or STATEMENT 2(ii)

I hereby give consent for my dissertation, if accepted, to be available for photocopying and for inter-

library loans, and for deposit in the University’s e -Repository after expiry of a bar on access approved

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Supervisors Statement:

Student Name/Number: James MacLeod-Nairn/ST05002068

Supervisor’s Name: C. T. Parry.

I acknowledge that the above named student has regularly attended the planned meetings and

actively engaged in the dissertation supervision process. They have provided regular timely draft

chapters of the dissertation and followed given guidance.

Signed ……………………………………………………

Date …………………………………………………


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Acknowledgements:

I am using this opportunity to express my gratitude to everyone who supported me

throughout the course of this MSc Finance dissertation. I am thankful for their guidance,

invaluably constructive criticism and friendly advice during the course of this work. I am

sincerely grateful to them for sharing their truthful and respective views on a number of issues

related to the project.

I express my deepest thanks to my supervisor Mr. C. Parry, without his guidance this would

not be possible, in addition to Dr C. Larkin for his invaluable insights and advice, also special

mention to Dr S. Kyaw, Mr M. Gundermann, Mr M. Win-Pe and finally Mrs J. Stockford for

their invaluable support and guidance.

Furthermore I would like to thank Mrs J. Levy for her support and help, in addition to the CSM

personal tutors. I would also like to thank Mrs R. McNaughton, Mrs H. O’leary and Mr J. Hay

from the study skills team for their help.

I would also like to thank Dr Hafiz Hoque from the University of York for his direction.

Lastly, it is important to mention the love and support given to me by my family and friends

as they have given me the strength and determination to get through what has been a difficult

but rewarding time.

Thank you,

James MacLeod-Nairn


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Abstract:

Since the recent financial crisis that has had a devastating impact on the global economy, the debate

over the prudential regulation of financial institutions has increased. The efforts made by

international regulators to try and prevent a reoccurrence of these events have started to be

implemented and the effects of which are becoming apparent.

This paper tries to address this issue by comparing the performance of Barclays Bank Plc and the Royal

Bank of Scotland from 2001 to 2014 using standard performance metrics and data from annual

reports, in order to make a comparison of their performance pre and post credit and sovereign debt

crisis. This is important because Barclays was able to maintain its independence by seeking

independent funding from its investors in order to re-capitalise itself from the consequences of the

credit crisis, whereas RBS was not so fortunate and the UK government had to take an 81% equity

stake in the company to save it from collapse. In this case, this research attempts to address whether

the structural changes in the UK financial industry through the new regulations and regulatory bodies

created have impacted their performance, furthermore have the actions taken in order to save these

banks increased shareholder wealth in addition to creating a situation where the culture excessive risk

taking still exists therefore creating a situation of moral hazard.

The results of this paper show that the government ownership has had a dramatic impact on RBS and

it is clear that the recent events have made it considerably less profitable and reduced shareholder

wealth compared to Barclays post 2012. The independence of Barclays has not only increased its

performance but has actually increased shareholder wealth. But what is evident is that the changes

to RBS have substantially reduced its bonus culture and reliance on investment banking whereas

Barclays has not, suggesting the effect of nationalisation has made RBS a far more stable bank less

likely to have difficulties than Barclays if another crisis occurs.

Keywords:

Banking Performance, Moral Hazard, Nationalisation, Bailouts, Regulation.


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Table of Contents:

1) Introduction-------------------------------------------------------------------------------------------- Page12

2) Aims, Objectives & Rationale ---------------------------------------------------------------------- Page 15

3) Background Information ---------------------------------------------------------------------------- Page 16

3.1) Global Banking Industry Overview --------------------------------------------------- Page 16

3.2) Barclays Bank Plc ------------------------------------------------------------------------- Page 18

3.3) RBS Plc -------------------------------------------------------------------------------------- Page 19

4) Literature Review ------------------------------------------------------------------------------------ Page 20

4.1) Historical Examples of Banking Crises ----------------------------------------------- Page 20

4.2) Banking Issues from 2001 to 2008 --------------------------------------------------- Page 23

4.3) Banking Performance ------------------------------------------------------------------- Page 26

5) Methodology ------------------------------------------------------------------------------------------ Page 29

5.1) Introduction ------------------------------------------------------------------------------- Page 29

5.2) Research Philosophy -------------------------------------------------------------------- Page 30

5.3) Research Approach ---------------------------------------------------------------------- Page 33

5.4) Research Strategies ---------------------------------------------------------------------- Page 34

5.5) Rationale for choice of banks ---------------------------------------------------------- Page 36

5.6) Rationale for events chosen ----------------------------------------------------------- Page 36

5.7) Performance metrics -------------------------------------------------------------------- Page 37

5.8) Reliability and Validity ------------------------------------------------------------------ Page 38

5.9) Limitations --------------------------------------------------------------------------------- Page 38

6) Findings & Analysis ----------------------------------------------------------------------------------- Page 38

6.1) Introduction ------------------------------------------------------------------------------- Page 38

6.2) Analysis from 2001 to 2007 ------------------------------------------------------------ Page 40

6.3) Analysis from 2008 to 2014 ------------------------------------------------------------ Page 47

6.4) Overall -------------------------------------------------------------------------------------- Page 57

7) Discussion ---------------------------------------------------------------------------------------------- Page 58

8) Conclusions & Recommendations ---------------------------------------------------------------- Page62


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9) References --------------------------------------------------------------------------------------------- Page 67

10) Appendix ---------------------------------------------------------------------------------------------- Page 73

10.1) Barclays Data from 2001 to 2007 --------------------------------------------------- Page 73

10.2) Barclays Data from2008 to 2014 ---------------------------------------------------- Page 74

10.3) RBS Data from 2001 to 2007 --------------------------------------------------------- Page 75

10.4) RBS Data from 2008 to 2014 --------------------------------------------------------- Page 77


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Table of Charts, Graphs and Figures:

Figure 1: UK Jobless Figures (ONS, 2015) ----------------------------------------------------------- Page 13

Figure 2: UK Productivity (Trading Economics, 2015) ------------------------------------------- Page 13

Figure 3: Total profits in top 1000 by country (thebankerdatabase 2014) ----------------- Page 17

Figure 4: Pre-tax profits by region (thebankerdatabase 2014) -------------------------------- Page 17

Figure 5: iShares Global Financials ETF 2001 to 2013 (iShares, 2014) ----------------------- Page 18

Figure 6: Research Onion ------------------------------------------------------------------------------ Page 30

Figure 7: Barclays and RBS share price July 1988 to May 2015 ------------------------------- Page 39

Figure 8: DJI, FTSE 100, Barclays and RBS comparison from 30th April 1999 to May 26th 2015 ---------------------------------------------------------------------------------------------------------------- Page 39

Figure 9: MSCI World, MSCI World Banks, MSCI ACWI IMI Index from 2000 to 2015 (MSCI) ---

---------------------------------------------------------------------------------------------------------------- Page 39

Figure 10: Barclays, RBS and FTSE 100 Share Price 2001-2008 (Google Finance) -------– Page 40

Figure 11: Barclays Operating Income, Operating Expenses and PPOP 2001-2007 ------ Page 40

Figure 12: RBS Operating Income, Operating Expenses and PPOP 2001-2007 ------------ Page 41

Figure 13: BOE Interest Rates from 2001 to 2009 ------------------------------------------------ Page 42

Figure 14: FED Interest Rates from 2002 to 2014 ------------------------------------------------ Page 42

Figure 15: M4 Lending, M4 Deposits and NIM 1999 to 2008 (MoneyMovesMarkets) -- Page 43

Figure 16: Barclays and RBS Provisions for Bad and Doubtful Debts 2001-2007 --------- Page 43

Figure 17: Barclays and RBS EPS (Diluted) 2001-2007 ------------------------------------------- Page 44

Figure 18: Barclays and RBS ROA (Return on Assets) 2001-2007 ----------------------------- Page 45

Figure 19: Barclays and RBS ROE (Return on Equity) 2001-2007 ----------------------------- Page 46

Figure 20: Barclays and RBS Gearing 2001-2007 ------------------------------------------------- Page 46

Figure 21: Barclays and RBS P/E Ratio 2001-2007 ------------------------------------------------ Page 46

Figure 22: 3 Mont LIBOR from 2004 to 2015 (Global Rates) ----------------------------------- Page 48

Figure 23: Barclays, RBS and FTSE 100 Share Price 2008-2015 (Google Finance) -------- Page 50

Figure 24: Barclays Operating Income, Operating Expenses and PPOP 2008-2014 ------ Page 51

Figure 25: RBS Operating Income, Operating Expenses and PPOP 2008-2014 ------------ Page 52

Figure 26: Barclays and RBS Provisions for Bad and Doubtful Debts 2008-2014 --------- Page 53


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Figure 27: Barclays and RBS EPS (Diluted) 2008-2014 ------------------------------------------- Page 53

Figure 28: Barclays and RBS ROA (Return on Assets) 2008-2014 ----------------------------- Page 54

Figure 29: Barclays and RBS ROE (Return on Equity) 2008-2014 ----------------------------- Page 54

Figure 30: Barclays and RBS P/E Ratio 2008-2014 ------------------------------------------------- Page55

Figure 31: Barclays and RBS Gearing 2008-2014 ------------------------------------------------- Page 56


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List of Acronyms:

SIFI: Systemically important financial institution

CSR: Corporate social responsibility

FSB: Financial Stability Board

PRA: Prudential Regulation Authority

GVA: Gross value added

M&A: Mergers and acquisitions

FDIC: Federal Deposit Insurance Corporation

FED: The Federal Reserve Bank

BOE: Bank of England

FSA: Financial Services Authority

ECB: European Central Bank

CDO: Collateralized Debt Obligation

CEO: Chief Executive Officer

LIBOR: London Interbank Offered Rate

CRD: Capital Requirements Directive

PPOP: Pre-Provision Operating Profit

ROE: Return On Equity

ROA: Return On Assets

P/E: Price-Earnings

QE: Quantitative Easing

SME: Small and medium-sized enterprises

NIM: Net Interest Margin

FOREX: Foreign exchange market


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1) Introduction

Due to the recent financial crises, the debate of financial regulation has increased, in

particular whether the current regulatory framework is adequate enough to deal with an

extremely complex industry that far outpaces regulators ability to keep up.

The reality is that up until the financial crisis in 2008, as there was a bull market and everybody

was happy to ride the upswing, very little attention was paid to what the banks where doing

with regards to complex derivatives and mortgage backed securities. There were some

prophesies of problems that stirred within financial markets, such as that by Raghuram Rajan,

the then the governor of India's central bank, who tried to raise awareness in 2005 of these

issues, however three years later his prophesy came to pass with disastrous consequences.

Due to the nature of the crisis, unprecedented actions were taken in order to stem the

problems caused by both the crisis in 2008, then the Sovereign debt crisis in late 2009. Actions

taken, such as that of the intervention of central banks in financial markets with QE and the

bailouts and nationalisation of banks.

Rajan now suggests that central bankers “have convinced markets that we continuously come

to their rescue” (Schuman, 2014), implying they will come in and rescue distressed markets

every time they get into trouble, which implies that the problem of moral hazard may be

pervasive throughout financial markets and needs to be addressed.

Rajan also suggests that because of loose monetary policies and unorthodox programs

implemented, financial markets may be in more difficulty than economists and bankers are

leading us to believe, in so much as that asset prices are overly inflated and do not represent

their true fundamentals. This will in turn, at some point come crashing down, as the true

underlying problems have not been addressed.

Up until the financial crisis of 2008, it had been argued by economists bankers and politicians

that there was not enough regulation by some and too much by others, whatever the debate,

the reality was that there was not enough or effective prudent regulation as highlighted by

the various commissions set up by the governments to look into the financial crises, which led

to excessive risk taking by banks to try and continuously provide above average returns for


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themselves and their shareholders. As a consequence, this was one of the main factors that

contributed to most damaging financial crisis in history (Nichols et al, 2011).

What is important to mention, was the devastating impact the recent banking failure has had

on the socio-economic conditions of the global economy, particularly in the UK where

unemployment has risen to levels not seen since the early 1990’s and there was a

considerable drop in productivity, as can be seen in the graphs below.

Figure 1: UK Jobless Figures (ONS, 2015).

Figure 2: UK Productivity (Trading Economics, 2015).

What is important is not to try and understand why and what caused these problems but to

try and identify weather the changes ex-post have made an impact on these two banks, as

their future success or failure is likely to have an impact on the UK economy as Banking

contributes substantially to GDP and tax revenue, as highlighted in a recent report “In 2014,


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financial and insurance services contributed £126.9 billion in gross value added (GVA) to the

UK economy, 8.0% of the UK’s total GVA” (Tyler, 2015) up from 5.6% in 2001. Furthermore,

the UK government owns 80% of RBS (UKFI, 2015) and at according to the mandate of the

company set up to manage its assets: “UKFI is responsible for devising and recommending

strategies to HM Treasury for returning the banks to private ownership, realising value for the

taxpayer and executing the chosen strategy”. Therefore it is important for the government

and the taxpayer that its successful performance will inherently determine at what price to

liquidate its holdings and at least provide a break-even of this asset, as it chose to bailout RBS

by becoming a shareholder rather different than the US Governments strategy to save some

of its banks.

This is why the issues of prudent financial regulation to deal with the complex nature of

financial markets and the entities that operate within them is extremely important for the

future stability and security of global financial markets. Because without trying to address

these issues, by looking at the fundamentals of banks and trying to identify if the events of

the past few years has helped to change them for the better.

Furthermore, it would be extremely difficult for any regulation that is implemented in the

future, to be successful in trying to curb behaviour that led us into these problems in the first

place, without looking at the effects these have had on their performance and their attitude

towards risky behaviour.

As to the researchers knowledge little or no research has been conducted on the changes and

performance of banks within the UK ex-post credit and sovereign debt crises, particularly

comparing a nationalised and non-nationalised bank.

This is why, for the purpose of this research, it is helpful to look at two banks which have been

designated as “systemically important financial institutions” (SIFIs) from the UK, as a case

study, analysing their performance pre and post financial and sovereign debt crisis, in order

to find out whether the impact of new regulations, structural changes within the financial

market, bailouts and nationalisation has and in what way had an impact on them. In addition

looking at as a comparison, the financial data of both banks to identify whether the

nationalisation of RBS has improved its performance as opposed to Barclays who sought

independence from government intervention by sourcing funds from the Middle-East.


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2) Aims, Objectives & Rationale

Aim

To discover whether the implementation of new regulations, structural changes within the

UK financial market, nationalisation affected the performance of Barclays bank and Royal

Bank of Scotland post credit and sovereign debt crisis analysing data from 2001 to 2014.

Research Questions

1) Has there been an overall increase of decreased of shareholder wealth from 2001 to 2014?

2) Has the nationalisation experienced by RBS created a situation where it can continue taking

excessive risk, thereby adding to the evidence that safety nets create moral hazard?

3) Has the independence sought by Barclays post crisis improved its performance vis-à-vis

RBS?

Rationale

The recent events have undoubtedly had a huge impact on banking and its future,

furthermore it is obvious that the recent structural changes and the perception of banks will

have an effect on them, but what is unclear is if these changes have impacted them and

particularly in what way. Therefore this needs further exploration as it is extremely important

not only for the banks themselves but for also shareholders, governments, regulators and the

general public as any changes that impacts these banks will have consequences for its

stakeholders.

Furthermore, the outcomes of this paper will show, whether since RBS’s subsequent bailout

and nationalisation, it has improved its financial performance and made enough significant

changes so that when the government decides to liquidate its holding is it likely they will get

a good return but also if the bank does go back to private ownership what impact has the past

six years had on it and is it likely to go back to its old ways, or is it become a much safer bank

with a change in attitude towards certain risk taking behaviour.

As a comparison, Barclays was injected with private funds and was not nationalised, it is

interesting to know whether the private injection of capital has had a different impact,


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therefore allowing certain changes to take place which would allow it to operate in a different

way from RBS, such as curbing risk taking behaviour and increasing shareholder wealth

greater than RBS.

Furthermore, both Barclays and RBS needed assistance after the crises, does this fact suggest

that either of them will continue taking excessive risk or has the changes in regulation,

nationalisation, regulatory oversight and capital injection forced them to change the way they

operate, from an inherently risky bank to a safe bank. In addition how these events have had

an impact on their performance and the ramifications for its shareholders, because up till the

recent crises it could be argued they were successful banks providing shareholders with an

increase in shareholder wealth, but was this due to strong fundamental growth or excessive

risk taking behaviour.

3) Background Information

3.1) Global Banking Industry Overview

Since 2001, there have been radical and fundamental changes to the global banking industry

and just after recovering from the issues it faced in the 90’s; the events of 9/11 marked the

beginning of a period of growth up until 2007 when the financial crisis hit. Since then, banks

have had to shed thousands of jobs, had to make trillions of dollars in write downs of bad

assets and had to refocus their business models requiring them to shed non-core businesses.

However from recent data, it seems that the global banking is starting to look healthy;

according to Global profits for The Banker’s Top 1000 World Banks ranking for 2014, the

global banks made profits of $920bn in 2013 an increase of 23% from the previous year, for

the first time exceeded the profits in 2007 of $786bn (TheBanker, 2014). As can be seen from

the graph below certain countries are faring better than others, particularly the US and China

but while others are still have modest growth suggesting not all countries have overcome the

difficulties they have faced recently.


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Figure 3: Total profits in top 1000 by country (thebankerdatabase 2014).

What is important to note is the change in the geographical change of the biggest banks and

the profits made, as the graph above shows since 2007 China has surpassed the US in profits

made and also has some of the biggest banks in the world, in addition has the largest pre-tax

profits compared to the rest of the of the world as seen in the graph below.

Figure 4: Pre-tax profits by region (thebankerdatabase 2014).


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In addition, as can be seen from graph below; the iShares Global Financials ETF which shows

a considerable growth since 2011 indicating a sustained period of growth in share price

recovering from considerably since 2008 and 2011.

Figure 5: iShares Global Financials ETF 2001 to 2013 (iShares, 2014).

However, there is some debate over the sustainability of this growth with changes in

regulation, cost cutting measures, alterations to banks balance sheets and changes in their

business models. What is important to note is to try and understand what is driving this

growth, whether it is strong fundamentals or an unsustainable bubble possibly leading to

another banking crisis.

3.2) Barclays Bank Plc

Barclays Bank PLC heritage comes from a London goldsmith bank in 1690 which predates the

Bank of England, started by John Freame and his brother in law Thomas Gould where money

was deposited and the depositor was issued with a receipt which was used as money.

Barclays entered into the picture in 1736 when James Barclay joined the firm and the firm

grew by helping to finance building of canals, bridges and various other enterprises. The bank

grew due to the help the British economy needed; over the next 100 years it merged with

other banking firms to become a nationwide bank. Such acquisitions included London,

Provincial and South Western Bank in 1918, British Linen Bank in 1919. Since the deregulation

in the 1980’s it slowly began to expand globally with various global affiliates and acquisitions

implemented. More recently; Mercantile Credit in 1975, the Woolwich in 2000 and the North


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American operations of Lehman Brothers in 2008 due to its collapse in the crisis. Up until

2007 it made many more acquisitions, making it one of the largest global banks operating in

50 countries, with 139,000 staff with assets of £1.3trn and an income of over £18bn (Barclays

Annual Report, 2013).

However, unlike RBS it was able to receive funding from a mixture of sources which included

sovereign wealth funds and Gulf Royal families which allowed it to avert nationalisation.

3.3) RBS Plc

The Royal Bank of Scotland Group PLC is one of the world's leading financial services

providers, one of the oldest banks in the UK and was founded in Edinburgh, by royal charter,

on 31 May, 1727. During the 19th century it developed a large presence throughout Scotland

and in 1874 opened its first branch in London, since then through organic growth and

acquisitions has grown from a Scottish bank into a British bank. In an effort to diversify it set

up the Direct Line Insurance Company in 1980, which was the first telephone only insurance

company, which employs over 10,000 staff in the UK. Following this it acquired Citizens bank

in an effort to gain access to the US market in 1988. In 2000 it acquired National Westminster

bank and its subsidiary Ulster Bank which was the biggest takeover of a bank in UK history. In

2004 it acquired Juniper capital a US credit card issuer, in the same year Citizens acquired

Charter One bank for $10bn helping it to become a quarter of Barclays revenue stream. These

acquisitions helped it to become one of the largest financial institutions in the world with

assets of £1.027bn, income of £16.7bn and 118,600 employees (RBS, 2013), operating in 38

different markets.

However in 2007 it acquired parts of the Dutch bank ABN Amro with a consortium consisting

of Fortis and Banco Santander; after a battle with Barclays; subsequent difficulties arose with

the ABN Amro deal because this caused it a lot of problems just before the financial crisis in

2008 as it had to take on a large amount of debt to fund the takeover just before the crisis

hit. In April 2008, under the supervision of CEO Fred Goodwin the company issued a rights

issue of £12b from investors to sure up its balance sheet, not long after this the financial crisis

hit and its share price collapsed by 95% and had to be bailed out by the government. In late

2008 it had to make vast write downs on assets due to the credit crisis, and announced that

it would be making a loss for the first time.


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After 2008, it faced huge financial difficulties which like other banks required a huge injection

of capital to keep it afloat, unfortunately this was not enough and it found itself unable to

recapitalise itself and the government had to step in and part nationalise the bank.

4) Literature Review

4.1) Historical Examples of Banking Crises

Historically, there have been many examples of banking failure and collapse, some been

contained and managed, others causing financial contagion and economic crises. What is

evident from these examples highlighted below, as discussed by Calomiris (2009) is that

actions taken ex-post crises by regulators and central banks are not always successful in

dealing with the problem that caused the banks to get into trouble in the first place or manage

to mitigate further damage caused by banking failure. In addition, there is growing evidence

that the prominent reason for most banking crises is due to ineffective regulation, as

discussed below.

By conducting historical analysis of banking panics and waves of banking failures, Calomiris

(2009) suggests that they are not due to business cycles, monetary policy errors, balance

sheet restructures (due to liquidity injection), human nature, not random events and do not

necessarily coincide with each other. Instead, suggests they are due to “risk-inviting

microeconomic rules of the banking game that are established by government have always

been the key additional necessary condition to producing a propensity for banking distress”

(Calomiris, 2009, pg 1), such as that of government subsidies and safety nets.

The following examples prove useful as learning lessons, highlighting the myopic view of

human nature, particularly with regards to banking crises . Some events are more well-known

than others, but all are important and serve useful by providing a foundation for future

analysis and context for understanding the problems currently faced in the banking industry

and may shed some light on a suitable course of action ex-ante and ex-post financial crises by

regulators and banks.

One of the earliest known examples of a central bank becoming what today is referred to as

the “lender of last resort” and a banking rescue was in 1890, when the aptly named “Baring

Crisis” occurred, in which the house of Barings (which today is known as Barings Bank) had to


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be rescued by the British government due to excessive risk taking and poor investment

decisions in Argentina (Paolera and Taylor, 2001). Help from the governor of the Bank of

England and a consortium of banks, created a pool of funds in order to guarantee their debts.

This stopped this event from creating a larger financial crisis in Britain, but for some

Argentinian banks they were not so lucky and could not be rescued, consequently were

allowed to fail which led to an economic crisis , recession and somewhat of a global financial

contagion as many other countries were deeply impacted. As discussed by Paolera and Taylor

(2001) they suggest that the problems with the banks in Argentina were due to a lack of sound

regulation and transparency in the operations of the banking system. This does add to the

debate over government intervention, as in one case intervention helped stem a crisis in one

country and no intervention led to a disastrous crisis in another, furthermore this case

highlights that sound regulation was not apparent and led to excessive-risk taking.

A more recent case to highlight, was in the US in 1929, whereby speculation, asset bubbles

and excessive spending led to the great market crash, proceeded by the banking failure the

following year which consequently led to the monumentally disastrous period after known as

the Great Depression. Friedman and Schwartz (1971, cited by DeLong 2015) argue that it was

the failure of the Federal Reserve to take the correct and necessary action to limit the damage

caused, which exacerbated and protracted this period longer than necessary. However, as

Pongracic Jr (2007) suggests the reason for both errors were that they “were due to factors

that are innate to the capitalist system, unchecked under the supposedly laissez-faire policies

of Herbert Hoover”, indicating that there might be more to the problem than just lax

regulation that allowed asset bubbles and excessive risk taking to take place, and this might

be just a symptom of a more inherent problem within a capitalist system if left to its own

devices especially when combined with lax regulation.

Recently, according to Edwards (2000), up until the late 1990’s there have been “90 banking

crises throughout the world where banking system losses have equalled or exceeded those

experienced by the US banking system in the Great Depression”, suggesting that there is an

increased rate of banking failure, crises and the damage caused becoming much greater.

Edwards (2000) continues by highlighting that even amongst academics they cannot come to

any consensus on the right course of optimal prudent regulation, consequently find it

extremely difficult to convince central bankers what course of action should be taken. This


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indicates that even after some of the most disastrous banking crises, some lessons have either

not been learnt or prospective regulation is extremely difficult to correctly deal with an ever

changing and complex industry.

One of the most notable examples of this problem, was that of LTCM (Long Term Capital

Management), where, under the supervision on the Fed, various financial institutions

combined to recapitalise the fund after the 1997 Asian and 1998 Russian financial crises, then

finally going into liquidation (Lowenstein, 2000). The reason for LTCM’s collapse as suggested

by Edwards (1999) was to due speculation, hubris and excessive risk-taking, but

fundamentally was an issue of lax regulation of the hedge-fund industry, as Edwards (1999)

describes: “regulation has fallen seriously behind market developments, perhaps especially

with respect to hedge funds and off-exchange derivatives markets”. This implies that the rate

of financial innovation and the use of new financial instruments may be at the heart of many

more recent banking crises and regulators may be slow to regulate these activities, as they

may be always trying to play catch up.

Another example of a banking crisis was the “Secondary Banking crisis” in the UK which lasted

from 1973-1975, in which according to Lambert (2008) where an "estimate in 1978 put the

figure at around £100m” injected by the BOE into secondary lenders to stabilise and try and

stem a financial contagion, which was cause by erratic growth in money markets and

deregulation. What was different, as Lambert (2008) suggests, was that there was no media

coverage of what was going on and was kept behind closed doors, which may have actually

helped the situation as financial contagion may be (in part) to do with media coverage. As

today the media covers all crises and may actually exacerbate crises as customers may have

felt insecure and may have led to a run on the banks. What is interesting was that the then

governor of the BOE had enormous power over the banking industry and was able to wield

that power if banks did not adhere to the “status-quo”, consequently another blunder by

regulators which again led to a housing bubble coupled with risky lending and deregulation

led to another financial crisis that nearly brought down the banking industry.

Furthermore, in 1984 the Continental Illinois National Bank and Trust Company became the

largest bank failure in US history up until the crisis of 2008 according to Haltom (2013), which

was due to the banks unrelenting pace of growth due to M&A’s, in addition to s peculation


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and excessive risk-taking. Part of the problem, was as Haltom (2013) suggests was that this

bank was heavily interconnected with other banks, as the FDIC estimated that 2,300 banks

had invested with the bank. As the failure of this bank raised severe concerns over the

possibility of financial contagion, the FDIC unusually had to step in and provide assistance way

beyond anything it had ever previously done in such situations; “Its failure raised important

questions about whether large banks should receive differential treatment in the event of

failure” (Haltom, 2013). This situation gave rise to a new debate over how banks that are “too

big to fail”, get into difficulty, and consequently have to be rescued due to the systemic risk

they pose due to failure. In addition the idea of moral hazard came into play, as banks of this

nature will take excessive risk after intervention as themselves and their creditors would not

bear the full cost of future failure.

Another important example was in the US from 1986-89 “the thrift cleanup was Congress’s

response to the greatest collapse of U.S. financial institutions since the 1930s.. the Federal

Savings and Loan Insurance Corporation (FSLIC), closed or otherwise resolved 296 institutions

with total assets of $125 billion” (Curry and Shibut, 2000). Again this is a case where the

taxpayers had to foot the bill, due to excessive risk taking caused by deregulation but also

volatility in interest rates and a bull market in housing. But as Curry and Shibut (2000) suggest,

lack of understanding by regulators of the true nature and severity of the problem ex-post.

This highlights again the problem regulators have with regards to managing a complex and

multi-faceted industry ex-ante and ex-post banking crises.

4.2) Banking Issues from 2001 to 2008

From 2001 onwards, there have been numerous events that impacted financial markets; most

notably where the events of 9/11, the sub-prime mortgage crisis leading to the credit-crisis

then the sovereign debt crisis. However, before addressing the issues of the sub-prime

mortgage, credit and sovereign debt crises, it should be mentioned that just before the

tragedy of 9/11, the events of the Asian Financial crisis in 1997, which raised concerns of a

global financial contagion (king, 2001) and the end of the Dot-com bubble in 2000, which was

partly due to capital markets and venture firms pumping money into companies combined

with expansion then contraction of the money supply (DeLong and Magin,2006), which was

termed “irrational exuberance” by Alan Greenspan.


24

These events help to mark the begging of a new bull market that lasted until 2008, however

it is important to mention that bubbles are not always coupled with banking crises and

recession, as Aoki and Nikolov (2011) highlights the examples of the dot-com and 1987 crash

in which “the collapse of asset prices did not result in a banking crisis and a severe contraction

of real economic activity”. This is also discussed by Reinhart and Rogoff (2008), who take a

historical view of economic and banking crises, suggest that they may be due to “a protracted

deterioration in asset quality, be it from a collapse in real estate prices or increased

bankruptcies in the nonfinancial sector”, in addition argue that large increases in non-

performing loans and bankruptcies may be a good indicators of banking distress.

Both of these events impacted financial markets just prior to 2001, as a result the role banks

that played in these events was in large part due to their speculative activities, which again

brought into question the issue of banking regulation and the possible damage excessive risk

taking could pose to financial stability. King (2001, pg 23) suggests that the Asian financial

crisis was an “unexpected consequence of international efforts to increase the stability of the

financial system by imposing a common risk-weighted capital standard on banks”, indicating

that the issue of implementing regulations on banks may have unintended negative

consequences not only on banks, but may as suggested, increase the likelihood of further

financial crises and the social consequences of such crises. This implies that regulation is very

complex both on how it is implemented and its consequences; therefore time may be the

main factor on how to determine its desired results and whether it is a success or failure, as

the implementation of any new regulations may do the opposite of creating stability in the

financial markets.

After Asian financial crisis and the collapse of the Dot-com bubble, the tragic events of 9/11

had a significant impact on financial markets causing global indices to become volatile due to

uncertainty and risk aversion (Neely, 2004). This event had a particularly detrimental effect

on the banking system due to banks in the US not being able to process and send payments,

because of the breakdown, this caused a liquidity issue and the Federal Reserve had to step

in (Neely, 2004).

In the EU, there was an increase in the demand for liquidity which was indicated by the

overnight interbank lending and interest rate spikes. In the UK the BOE had to act in much


25

the same way as the FED and ECB to stabilise financial markets, concerns that this event would

push the weak economies into a recession. At this point, it was necessary and warranted

intervention due to the issue that these economies had just recovered from economic

recession in the 1990’s and had maintained growth up until 2001.

The effect of 9/11 changed many things, as highlighted by Burger (2013), the banking industry

played a significant role in sanctions in addition to anti-money laundering efforts aimed at

cutting off the funding of terroristic governments and organisations. Legislation was

implemented, that changed the way banking was conducted such as stricter due diligence,

and digitisation of paperwork which help to reduce fraud, increased efficiency and reduced

costs. However there are those within the banking community that argue that it has made

the whole process of conducting business much more difficult.

However, the consequences of this event laid the foundation for what was a period of

exuberant government spending and an economic bubble, as highlighted by Warner (2011)

looking in hindsight at the events post 9/11, “With all major catastrophes, the long-term

damage tends to be inflicted not by the event itself but by the response to it” . Not long after,

the US and the UK went into two wars which dramatically increased government spending,

not only this but central banks went into overdrive with monetary easing which helped to fuel

a credit bubble.

From the period after 9/11 leading up to the crisis in 2008, there was much fear of a recession,

central banks lowered interest rates, as cheap credit fuelled a financial bubble with escalating

property prices and financial firms willing to lend to anyone. This cheap money managed to

find its way into sub-prime mortgage holders, which in the infinite wisdom of firms like JP

Morgan, Bear Sterns, Merryl Lynch etc. repackaged these into CDO’s and these where then

sold onto global financial institutions. Then, as interest rates were increased and housing

market became saturated, in 2006 things started to go downhill with borrowers defaulting on

their loans. This in turn affected the CDO’s that where held by financial institutions, and the

problems of the sub-prime mortgage came into effect in 2007.

This then leads us to the financial crisis in 2008; whereby a complex, profit-motivated industry

with a lack of prudent regulation and transparency led us to the most devastating economic

crisis since the Great Depression. This was primarily due to the unfettered use of mortgage


26

backed securities, collateralised debt obligations and credit default swaps by banks that

brought the global finance industry to collapse. As the crisis hit in 2008, the response from

government was much like that of its response after 9/11, to drastically cut interest rates and

implement radical conventional and unconventional strategies to deal with a failing banking

system, such as implementing large amounts of quantitative easing to increase liquidity in the

financial system, which had dried up due to banks hoarding cash to sure up their balance

sheets. In addition to nationalising some banks and purchasing toxic assets from these banks

in an effort to stabilise financial markets.

4.3) Banking Performance

Consequently, since the financial crisis in 2008, there has been much academic research into

banking and their performance, to try and identify certain issues, such as why certain banks

performed better than others during these crises and what factors may have contributed to

this. There is still much debate, where some consensus has been in some areas made by

academics, regulators and policy makers as highlighted below, as to what be some of the

factors that helped certain banks performance and had a detrimental effect on others.

Firstly, Hoque (2013) analyses the performance of SIFI’s during the Credit and Sovereign Debt

Crises, and suggests that SIFI’s performance during the credit crisis was related to the fact

that banks could gain easy access to short term funding, consequently meant that they could

take greater risks and lend more. From Hoque’s findings; It could be argued that the

implementation of Basel III capital adequacy provisions (increased tier 1 capital) helped banks

performance during the sovereign debt crisis, but not the credit crisis, indicating that new

regulation implemented post credit crisis may have had a beneficial effect on performance,

therefore were less risky, which may support the argument in favour for greater regulation

and not bailouts or safety-nets. In addition, Hoque’s (2013) results suggest that there was a

negative effect of a safety-net (deposit insurance) on SIFI’s performance contributing to

evidence that having these mechanisms in place allows banks to take greater risks and further

add to the debate on the problem of Moral Hazard.

In addition, the results indicate some similarities between SIFI’s performance during both

crises and suggest Beta and Idiosyncratic risks may explain this. Hoque highlights that after

his report was published there was another financial crisis (European Contagion which had a


27

smaller impact than the previous two) which did have an impact on SIFI’s performance.

However as Hoque (2013) describes; there is “much variation in the cross-section of the share

price performance”, indicating that Hoque (2013) was able to make comparisons between

SIFI’s in both crises, but was not able to do so for the European Contagion crisis in 2012. This

may highlight the difficulty in being able to determine the performance of SIFI’s, in particular;

using share price as a metric because share price is not only effected by the financial

performance, but due to other factors such as market sentiment, as highlighted by the

previous example of the dot-com era in which companies share prices did not truly reflect its

fundamentals.

Beltratti and Stulz (2012) looked at the performance of banks from 2007 to the credit crisis in

2008, and from their research they indicated that companies with more shareholder friendly

boards performed worse, as management where only interested in satisfying the short term

needs of its investors consequently taking greater risks for short term gains. However, in

contrast Beltratti and Stulz (2012) suggest that “in contrast, banks with more Tier 1 capital,

more deposits, and more loans performed better” during the crisis, indicating that firstly the

new Basel lll regulations may have saved a lot of banks from greater difficulties, which is also

shown to be the case by Demirguc-Kunt et al (2010). Secondly, banks that continued business

as usual instead of hoarding cash and restricting loans weathered the crisis as opposed to

others that did not. Furthermore, they conclude that banks with greater capital supervision

performed well, which adds credence to the “Stress Testing” tool used in order assess “the

ability of targeted financial institutions to weather the effects of unusually adverse economic

and financial market developments on their revenues, asset valuations, and loan losses”

(Furlong, 2011), which may have helped banks assess their weaknesses. Conversely, Beltratti

and Stulz (2012) suggest that banks with stronger regulators performed worse, indicating that

intervention may do more harm than good at the expenses of shareholders.

This highlights the debate over the mandate of banks, whereby they are required to make

returns for the shareholders, but to some degree do shareholders have a moral responsibility,

as there is growing literature on the topic of the link between CSR, shareholders and

performance (Dam and Scholtens, 2012), particularly when short-termism and excessive-risk

taking lead to disastrous consequences.


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Fahlenbrach et al (2012) conclude from their research that the experience of a crisis should

allow banks to adapt and learn from its mistakes so that it can perform better when another

crisis occurs which is termed the “Learning Hypothesis”, however they suggest that the

business model of a bank is directly related to their performance during crises and that if a

bank has the same model in one crises and does not change it so that when another crisis

happens they are likely to have poor performance; this is termed the “Business Model

Hypothesis”.

Their study tests the “Learning Hypothesis” and “Business Model” against the “Null

Hypothesis”; which concludes that each crisis is unique and that it affects banks in different

ways therefore its previous experience does not indicate its performance in another crisis.

They found that there was a correlation between poor performance in the first crisis and the

second; they suggested this was due to a culture of risk within the organisation and their

business models which did not change, therefore suggests that the null and learning

hypothesis is incorrect from the 347 banks it studied and that their evidence supports the

business model hypothesis.

Fahlenbrach et al (2012) also pose another question; whether there is a link between the

executives in charge and their personality traits contributed to the banks problems, from their

analysis they could not find a link; this is interesting as it has been said that the personality

traits of hubris and ego of Fred Goodwin led to many of the problems at RBS which suggests

that there may be a link between the personality traits of executives and the problems banks

faced in the crisis; the same could be said of John Varley the CEO of Barclays from 2004 to

2011 who was competing with Goodwin on many of the large acquisitions (for example the

ABN-Amro deal).

However in their findings they did find commonalities between the two crises, which was that

banks relied heavily on short term financing suggesting this form of financing is a contributing

factor to the riskiness of the banks and that they did not learn from their previous mistakes

Interestingly they conclude that deregulation in the US with the repeal of the Glass -Steagal

Act (1933) in 1999 (Gramm-Leach-Bliley Act) which some argue contributed to the financial

crisis in 2008 and the changes in employee compensation packages were not particularly


29

important in explaining the performance of banks, but what they do suggest is that their

performance in crises shows just how inherently risky they are and how exposed they were.

Fahlenbrach and Stulz (2011) explored whether there was a link between the CEO’s financial

incentives and banks performance during the credit crisis. They found that banks with higher

compensation packages for their CEO’s did not necessarily perform worse than others with

less favourable packages. With regard to the argument that executives had poor incentives

to act in the long term interest of the bank and that their compensation packages where not

in line with shareholders’ interests is important. Because this is of great importance to new

regulations implemented in the US and the UK, in particular the Dodd-Frank and Consumer

Protection Act.

The reason for the increase in the bonus culture in the UK was due to de-regulation in the

1980’s otherwise known as the “Big-Bang”; this event completely changed the financial

markets in the UK, however as discussed by Murphy (2013) it could be argued will not reduce

excessive risk taking and could incentivise staff to take bad risks and avoid good risks, in

addition to curbing talent attraction and retention. The question is have recent events put

into motion a new “Big-Bang” which changes financial markets in favour of more regulation

to curb much of the problems which due to the actions to deregulate banks, but may force

banks to operate outside of these markets as they are believe more regulations stifles their

ability to increase shareholder wealth, however such actions may not create sustainable

shareholder value and also may hurt the economy, which may lead to a situation of regulatory

capture as discussed by Hardy (2006).

5) Methodology

5.1) Introduction

As can be seen below is a diagram proposed by Saunders et al (2009) that is referred to as the

‘Research Onion’, which helps to depict the different elements that need to be addressed

when conducting research. This is useful as it helps the researcher break down the necessary

steps from the outer layer to the core as research is a multi-level process for establishing a

perspective for collecting and analysing data, as can be seen throughout the description of

this research methodology.


30

This chapter will be highlighting the main research philosophies and the main approach to

this research. Secondly which research approach will be used, thirdly the research strategy,

time horizon that will be used, credibility and validity, ethical considerations.

Figure 6: Research Onion

5.2) Research Philosophy

For research it is important to understand the key concepts in the philosophy of social

sciences, which are paradigm, methods, methodology, epistemology and ontology. These

different aspect are part of the framework or view of research, therefore it is necessary to

consider the different aspects of research paradigms in addition to epistemology and

ontology.


31

Ontology is described as “the science or study of being” and “what is the nature of social

reality” (Blaikie, 2000), or fundamentally, “what constitutes valid knowledge and how can we

obtain It?” (Raddon, 2010). It is a part of philosophy that focuses in the nature of what exists

and how things interact with each other, or as Flowers (2009) describes; “ is this an objective

reality that really exists, or only a subjective reality, created in our minds” when referring to

our view of the nature of reality. Furthermore, as Hatch and Cunliffe (2006) highlights that

complexity is introduced when addressing certain phenomena such as organisational culture,

control or power and as such, are they just an illusion or based in reality. Based on this, we

have to consider our ontological assumptions as these may add bias to our view and may

hinder our research because we must think about what the fundamental properties in the

social world are, because this may impact on what is studied and how it is studied, as

discussed by Eriksson and Kovalainen (2008). As this is not easy to answer there are different

views such as objectivism, and subjectivism which are the study of conceptions of reality.

Epistemology, as described by Blaikie (2000) “is a theory of knowledge, a theory or science of

the method or grounds of knowledge” and “considers views about the most appropriate ways

of enquiring into the nature of the world” (Flowers, 2009. Citing Easterby-Smith, Thorpe and

Jackson, 2008). Or as Raddon (2010) describes “what constitutes reality and how can we

understand existence”, but is fundamentally asking ourselves what is the limits of our

understanding and knowledge. Because there is no clear answers to this question there are

many approaches to this, briefly described are the four main approaches as suggested by

Saunders et al (2009) which are interpretivism, positivism, realism and pragmatism.

The First view, as Saunders et al (2009) highlights, is Interpretivism which “advocates that it

is necessary for the researcher to understand differences between humans in our role as social

actors”, in other words the way in which we try to make sense of the complex world aroun d

us, by trying to discover irrationalities in behaviour because in the context of this research

irrationalities are part of the problem. This is evident particularly when the actors involved

may not fully understand the consequences of their actions, as Saunders et al (2009) suggest,

that “Not only are business situations complex, they are also unique. They are a function of a

particular set of circumstances and individuals coming together at a specific time” , this is

highly appropriate for this research as the nature of banks is not only extremely complex, but

it is at its heart, studying human nature, the consequences of their actions and social


32

phenomena. This is also discussed by Eriksson and Kovalainen (2008) who suggest that “ in

this view, reality is socially constructed by interconnected patterns of communication.

Therefore, reality is not defined by individual acts, but by complex and organised patterns of

ongoing actions”. Particularly important is that interpretivism has an integral role in aiding to

produce results from data collected and is important to interact with the environment but to

also interpret and make sense of events, and to infer meaning from it.

The second view; Positivism as described by Flowers (2009) “is derived from that of natural

science and is characterised by the testing of hypothesis developed from existing theory”, this

position is used heavily in the studies of organisations and management as Eriksson and

Kovalainen (2008) explain that the nature of business knowledge “ is often functional by

nature, and there is a desire for universal truth that would hold across industries, businesses,

cultures and countries”. This is also important in this research because, there is existing

hypothesis that try to explain the behaviour of companies grounded in theory. However, it

has its shortcomings, firstly it makes assumptions about all processes; it inherently states that

all processes can be seen by the relationship between people or their actions. Secondly, for

business research it relies heavily on the status-quo and findings are descriptive and may not

true delve into the issues. Thirdly, some concepts (e.g. time, space and cause) are not based

on experience and do not derive themselves from knowledge (Research Methodology, 2015)

Thirdly, Realism as described by Saunders et al (2009) is similar to positivism in “that what the

senses show us as reality is the truth: that objects have an existence independent of the human

mind. The philosophy of realism is that there is a reality quite independent of the mind”. They

go on further to explain the two distinguishing forms of realism, which is critical realism; in

which we as humans only experience the world through our sensations, whereas direct

realism in contrast, infers that what we perceive is reality. However, Eriksson and Kovalainen

(2008) explain that this approach combines some of the ideas in interpretivism

(constructionism) and positivism, because as Flowers (2009) argues that realism came from

frustration with the rigidity of the views of constructionism and positivism. Furthermore

Hatch and Cunliffe (2006) argue “whereby surface events are shaped by underlying structures


33

and mechanisms but that what we see is only part of the picture”, this is important in trying

to view a complex world particularly in the context of this research.

However, for the purpose of this research will be adopting the Pragmatic approach, as this

involves using the best approach which is suited to the research problem as this allows greater

freedom by not being Pidgeon-holed into one approach. Furthermore, this approach allows

the researcher “the freedom to use any of the methods, techniques and procedures typically

associated with quantitative or qualitative research. They recognise that every method has its

limitations and that the different approaches can be complementary” (Alzheimer Europe,

2009). This is further discussed by Saunders et al (2009), from ontology allows the researcher

to view things externally and allows for multiple views, choosing the best view depending on

the nature of the research question. From what constitutes acceptable knowledge

(Epistemology); “Either or both observable phenomena and subjective meanings can provide

acceptable knowledge dependent upon the research question” (Saunders et al, 2009), this

therefore allows the use of quantitative, qualitative and mixed methods approaches which is

important in the context of this research as it is important to try and make connections

between the qualitative and quantitative elements that are used in order to find meaning to

the complex nature of field of study

5.3) Research Approach

There are two approaches; firstly the ‘Inductive’ approach which “aims to describe the

characteristics of people and social situations, and then to determine the nature of the

patterns of the relationships, or networks of relationships, between those characteristics”

(Blaikie, 2000), which suggests that has a limited capacity in answering certain questions, such

that of ‘why’ rather than ‘what’. It is used to produce generalisations to explain patterns and

then use these patterns to help to explain further observations.

Secondly, the ‘Deductive’ approach as Saunders et al (2009) describes, “involves the

development of a theory that is subjected to a rigorous test” and as Blaikie (2000) further

highlights that it works in reverse to inductive approach as “the researcher has to find or

formulate a possible explanation, a theoretical argument for the existence of the regularity in


34

the social phenomenon under consideration”. The deductive approach is the most suitable

for this research, as it is necessary to test theories from data, because from the deductive

approach it seeks to define relationships between variables by studying patterns and due to

the nature of this research it is necessary to use a structured methodology in order for

replication to occur for others to test the hypotheses of this study. This also requires a high

level of objectivity and independence which is necessary for scientific rigour, in addition

certain concepts have to be ‘Operationalised’ so that they may be measured quantitatively.

Thirdly the principle of ‘Reductionism’ must be followed, which is to say that complex

concepts or problems must be reduced to their simplest form. Finally, the last aspect of

deduction as Saunders et al (2009) highlights is known as ‘Generalisation’; “ in order to be able

to generalise statistically about regularities in human social behaviour it is necessary to select

samples of sufficient numerical size”. This is again useful for testing hypotheses as the bigger

the sample the more likely patterns can be measured and observed, therefore problems of

predictions are less likely to occur.

However there are both arguments for and against each approach, “Followers of induction

would also criticise deduction because of its tendency to construct a rigid methodology that

does not permit alternative explanations of what is going on.” Saunders et al (2009), and each

approach is more suited to a different type of methodology, however following an inductive

approach would allow for less rigidity in the methodology and may reveal different

explanations but tends to use qualitative approach rather than a quantitative approach.

5.4) Research Strategies

The case study approach has been chosen to investigate the financial performance of Barclays

Bank Plc and The Royal Bank of Scotland Plc post credit and sovereign debt crises, as this is

the most appropriate method as an approach as Yin, (2002, cited by Eriksson and Kovalainen,

2008, pg 118) defines a case study as an empirical inquiry that “investigates a contemporary

phenomenon within its real-life context when the boundaries between the phenomenon and

the context are not clearly evident”.

It is important therefore in the context of this approach, as Eriksson and Kovalainen, 2008 pg

115) explain that “the research questions are always related to the understanding and solving

of the case” as this is import to set boundaries especially in the context of this complex case.


35

Furthermore, investigating the case in relation to its historical, economic, technological, social

and cultural context, consequently it is a vital technique to look at this case in the context of

the problem, but most of all the case study approach helps to break down and present what

is an extremely complex situation with a multitude of issues in an accessible fashion to the

reader. However there are some who argue this method has its drawbacks, such as it being

anecdotal descriptions that do not stand up to scientific rigour.

Overall, the case study approach is extremely useful method for investigating the dynamics

and complexity of these two organisations, their performance and their relationship with

themselves and parties with a vested interest in their future success.

The use of descriptive statistics will be used as this enables the researcher to describe (and

compare) variables numerically with the use of diagrams.

Furthermore, quantitative data and qualitative elements will be used, so that both elements

can evaluated and ideas can be synthesised.

This will involve the use of descripto-explanatory studies, according to Saunders et al (2009)

combining both descriptive and explanatory research in order to show an accurate profile of

events then to establish causal relationships between variables.

The quantitative element of this research, for the purpose of effective analysis of the

performance of these two banks will be the use of standard performance metrics (e.g.

revenue, P/E ratio, EPS etc.) that are commonly used by financial analysts.

The qualitative aspect of this research will include several major events that have occurred

post credit crisis, and how have these events impacted these two banks by attempting to

make a linkage between these events and their financial performance, particularly have these

events have had a detrimental or beneficial effect for the company’s analysed.

In the case of this research it is necessary to adopt a cross-sectional longitudinal approach as

the time horizon will be from 2001 to 2014 comparing two companies, the data will be

collected from the accounts and reports from the two banks in addition to share price data

collected from Yahoo Finance for each year and the share price will be taken as of last day of

trading (usually 31st December, unless bank holiday or weekend). The dates of events and


36

regulations implemented will be taken from the various government agencies and recognised

news agencies.

The analysis of data will occur from the beginning of 2008 onwards to 2014 as this was the

year that both companies had to raise capital in order to bolster its balance sheet, however

data previous will be briefly shown as a historical context of their performance.

The data will come from the annual reports and accounts and tabulated using Microsoft Excel,

where necessary the calculations will be done using this software. From these calculations

graphs will be created in order to aid the description and analysis of the data.

5.5) Rationale for choice of banks

1) There designation as SIFIs. “In November 2011 the Financial Stability Board published an

integrated set of policy measures to address the systemic and moral hazard risks associated

with systemically important financial institutions (SIFIs). In that publication, the FSB

identified as global SIFIs (G-SIFIs) an initial group of global systemically important banks (G-

SIBs), using a methodology developed by the Basel Committee on Banking Supervision

(BCBS)” FSB Report (2014). Barclays (Bucket 3) and RBS (Bucket 2) are the only banks in the

UK with this designation.

2) Market Capitalisation, with Barclays (43.72bn) and RBS (23.88bn).

3) Both banks are based in the UK with global operations.

4) For useful comparative purposes between a nationalised and non-nationalised bank.

5.6) Rationale for events chosen

1) The nationalisation of RBS in 2008.

2) The injection of private capital into Barclays by investors in 2008.

3) Banking Levy by UK Government; instituted a levy on banks from the 1st January 2011 which

is a tax on the banks debts which was implemented to curb risky forms of borrowing.

4) Financial Services (Banking Reform) Act 2013 which came into effect on the 1st April 2013,

according to Foxwilliams (2013) “the Act makes extensive amendments to the Financial


37

Services and Markets Act 2000 (FSMA), the Bank of England Act 1998 and the Banking Act

2009 in order to facilitate the structural reforms”, this act created the PRA and the FCA and

brought the LIBOR under the oversight of the FCA to try and stop future manipulation from

occurring, but fundamentally these organisation were created to maintain financial stability.

5) Dodd-Frank Act (2010). As both Barclays and RBS have operations in the US, this will have

an impact on them.

6) CRD IV: came into effect on 1 January 2014, according to the FCA (2014) “The aim of CRD

IV is to minimise the negative effects of firms failing by ensuring that firms hold enough

financial resources to cover the risk associated with their business”.

5.7) Performance metrics

The metrics chosen are basic performance indicators rather than complex econometric

models of analysis. Some obviously important indicators are used, however PPOP (Pre-

Provision Operating Profit) has been used as the profit figure used to calculate certain

ratios, as can be seen below. The reason for the use of this profit figure is that it is a clearer

picture of its profit making ability before any deductions are made and will have an impact

on the ROA and ROE ratio.

- Share price. Data taken from Yahoo Finance.

- Operating Income. Data taken from annual reports.

- Operating expenses. Data taken from annual report.

- Pre-Provision Operating Profit (PPOP). Calculated as: (operating income - operating

expenses).

- ROA (Return on Assets). Calculated as: (Pre-Provision Operating Profit/Total Assets)*100.

Data taken from annual reports.

- ROE (Return on Equity). Calculated as: (Pre-Provision Operating Profit/Equity)*100. Data

taken from annual reports.

- EPS (Earnings Per Share, Diluted). Data taken from annual reports.


38

- P/E Ratio (Price Earnings Ratio). Calculated as: (Share Price/EPS).

- Gearing. Calculated as: (Debt/Equity)*100. Data taken from annual reports.

- Provision for Bad and Doubtful Debts. Data taken from annual reports.

5.8) Reliability and Validity

The data was collected from reputable sites where the data has not been manipulated, in

addition the majority of the data will come directly from the annual reports and accounts of

the banks, therefore reduced the likelihood of bias. The data used has been taking from the

correct sources and has analysed using existing measures and it is scientifically rigorous.

5.9) Ethical Considerations

As the quantitative data is freely accessible and in the public domain, therefore it does not

require permission from its owners for its use.

5.9) Limitations

The main limitations of the research is word count due to the extensive nature of the

subject area many academic papers and research could not be included. Furthermore, due

to time constraints which limited the amount of data that could be used and analysed.

6) Findings and Analysis

6.1) Introduction

This chapter will show the findings from the secondary data collected and analysis from 2001

to 2007 in order to highlight the performance of these two banks pre-crisis, then to look at

their performance post-crisis in order to find patterns that might indicate whether either bank

post-nationalisation and capital injection has performed better than the other and to

ascertain why this might be. However, it should be mentioned how devastating the financial

crisis impacted global equity markets particularly the banking sector as can be seen by the

graphs below, the crisis wiped vast sums off the value of global stocks and eight years on

some indices have still yet to reach their pre-crisis levels others have surpassed, particularly

the MSCI World Banks index which dropped from over 200 points pre-crisis to almost 50

points in 2009 and has taken almost five years to recover suggesting global banking stocks


39

have recovered. In the context of this analysis, from a longer term view of Barclays and RBS

share price as seen in the graph below the timeframes of analysis are pivotal in the history of

both banks and put into context how much of an impact these crises have had an impact.

Figure 7: Barclays and RBS share price July 1988 to May 2015.

Figure 8: DJI, FTSE 100, Barclays and RBS comparison from 30th April 1999 to May 26th

2015.

Figure 9: MSCI World, MSCI World Banks, MSCI ACWI IMI Index from 2000 to 2015 (MSCI).


40

6.2) Analysis from 2001 to 2007

As can be seen Barclays share price was quite stable with a minor dip from 2002-2003 but

gradually climbed from 500p in 2001 to just shy of 800p in 2007 helped by positive earnings

results year on year, from the data the operating income increased by 56% while its operating

expenses increased by 50% and PPOP increased by 68% from 2001 to 2007, suggesting that

up until 2008 it had been performing well and seemed to be a successful bank with continued

upward growth. However in comparison of PPOP as a % of revenue, it was 42% in 2001 and

this dropped to 35% in 2007 indicating that their expenses had increased, which may have

been due to an increase in staff costs from 2003 to 2007 and other expenses having an impact

on its profit margins.

Figure 10: Barclays, RBS and FTSE 100 Share Price 2001-2008 (Google Finance).

Figure 11: Barclays Operating Income, Operating Expenses and PPOP 2001-2007.

In the case of RBS, its share price remained stable up until 2007 where it climbed from 5000p

in 2001 to 6800p at its pinnacle in early 2007. Much like Barclays it had positive earnings

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results year on year which helped it to increase its share price to unprecedented levels.

However, it is worth mentioning that this was at the height of the bull market as large

amounts of capital flowed into equities combined with speculation which helped push the

FTSE 100 to levels not seen since 1999-2000, which again had a direct impact on both RBS and

Barclays share price in addition to the acquisitions both companies were driving through to

help them grow extremely quickly under the guidance of Fred Goodwin and Bob Diamond.

As can be seen from RBS results, its operating income increased by 47% while operating

expenses increased by 58% and its PPOP increased by 37 % from 2001 to 2007 indicating what

should have been a very healthy and prosperous bank with good future growth. However in

contrast to Barclays it managed to increase its PPOP as a % of operating income from 43% in

2001 to 54% in 2007 indicating that it had decreased its expenses and costs through various

cost cutting measures helping it to increase its profit margins.

Figure 12: RBS Operating Income, Operating Expenses and PPOP 2001-2007.

In addition, from the two graphs showing the BOE and FED interest rates, both dropped rates

from 2001-2003 in an effort to stimulate their economies, which in turn helped to fuel an

asset bubble in both housing and equities up until 2007. Then consequently started to raise

rates from 2003 until 2007 as they realised inflationary pressures were having an impact on

the US and UK economies growth, which in turn meant that both Barclays and RBS raised their

key lending rates which had an impact on their net interest margins as they could raise their

margins quicker than the cost of their own funding which may help to explain the

unprecedented PPOP growth figures for both Barclays and RBS in 2007.

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Figure 13: BOE Interest Rates from 2001 to 2009.

It is important to mention, that both Barclays and RBS have operations in the US and any

changes in interest rates in both the UK and US impact on their cost of borrowing.

Figure 14: FED Interest Rates from 2002 to 2014.

However as can be seen from the graph below which shows the estimates for lending,

deposits and NIM for UK banks, shows a gradual decrease in the NIM from 2001 to 2008 to

the lowest levels recorded. This suggests that the banks ability to make profits from lending

have been squeezed from 2001 onwards indicating that Barclays and RBS were using

government capital injection to bolster their balance sheets to protect themselves against

loan losses in addition to diversifying into other areas to increase profits as rate cuts were not

being carried through to the 3 month LIBOR rate due to the difficulties in financial markets.

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Figure 15: M4 Lending, M4 Deposits and NIM 1999 to 2008 (MoneyMovesMarkets).

Barclays provisions for bad and doubtful debts remained stable from 2001 to 2004 where it

increased drastically from £m 1,091 in 2004 to £m 2,795 in 2007 as it increased provisions for

defaults on loans prior to the crisis in 2007-2008. Much like Barclays, RBS provisions remained

stable until 2004, at which point they increased from £m 1,428 in 2004 to £2,128 in 2007,

again suggesting the anticipation of substantial write-downs.

Figure 16: Barclays and RBS Provisions for Bad and Doubtful Debts 2001-2007

As can be seen from the graph, Barclays EPS grew from 36.7 to 66.7 from 2001 to 2007

indicating steady growth per share, whereas RBS EPS grew from 66.3 in 2001 to 193.2 in 2006

then dropped to 75.7 in 2007, which was due to an increase in the amount of shares. Overall,

these figures do show a consistent amount of growth for both EPS figures indicating that

shareholder value was in theory increasing, however what the underlying driver of their

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profits is difficult to ascertain as they may have been utilising creative accounting to pad their

results to make it seem that there was genuine sustainable growth which turned out to be

false.

Figure 17: Barclays and RBS EPS (Diluted) 2001-2007.

Both the ROA and ROE are intended to see how the company’s ability to generate earnings

from its investments. ROA looks at management’s ability to generate profit from its assets,

whereas ROE shows whether management has been growing the company at an acceptable

rate for shareholders. For Barclays Its figures show a gradual decrease in its ROA from 1.3%

in 2001 to 0.6% in 2007 indicating that it was not able to efficiently produce growth in income

from its assets, suggesting that it was not actually performing well in this period due to a

number of factors such as the numerous M&A’s and restructurings that had impacted their

ability to sustain profitability suggesting the aggressive growth strategies were not working

and there was an indication that something was not right at its core. This is amplified be the

fact that investors were not looking at banks true fundamentals and the massive discrepancy

between what its share price should be and what it was up until 2007 again showed an over

inflated asset bubble and what turned out to be a very sick bank that investors still believed

was healthy until its collapse. Barclays ROE shows a gradual decrease as it increased the

amount of shares, but was unable to increase its profits.

What is interesting is the gearing ratio, as Barclays makes an effort to increase its equity

substantially by 942% from 2001 to 2007 thereby reducing it leverage, similar to RBS, however

it does not reduce its debt but increases it from by 52% in the same period.

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In regards to RBS, much like Barclays sought to grow exponentially though M&A’s, however

its ROA was stable from 2001 to 2006, but in 2007 dropped by 50%, suggesting it was able to

make a better ROA than Barclays again the data shows weaknesses in its profit making

abilities towards 2007. However investors were blinded and were not looking at its

fundamentals. Similarly to Barclays it ROE decreased substantially as it increased the amount

of shares and was unable to increase its profits. This is also reflected by its gearing ratio as it

increased its equity by 3305% from 2001 to 2007 and its debt by 332%. This is interesting as

both banks sought to deleverage themselves drastically over this period.

For both banks P/E ratio, they drop over this period, but are fundamentally lower as they are

perceived by investors as having slower growth prospects, but more so because of numerous

factors. Such as the impact of interest rate volatility, their leverage, economic cyclicality

assumptions and expectations made about their financials in addition to the banks ability to

grow, which is very difficult to do organically and therefore has to be done by M&A’s but

these are fraught with danger for obvious reasons. Barclays P/E ratio drops by 50% from 13.9

to 7.0 from 2001 to 2007, whereas RBS drops by 77% from 21.6 to 5.0.

Figure 18: Barclays and RBS ROA (Return on Assets) 2001-2007.

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Figure 19: Barclays and RBS ROE (Return on Equity) 2001-2007.

Figure 20: Barclays and RBS Gearing 2001-2007.

Figure 21: Barclays and RBS P/E Ratio 2001-2007.

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6.3) Analysis from 2008 to 2014

In mid-2007, news came from the US as Bear Sterns stated that it had lost money in two of

their key hedge funds due to their sub-prime holdings. Banks, central banks and regulators

started becoming nervous over the situation and liquidity problems started to take effect as

banks started holding onto cash. The situation was exacerbated by the high interest rates of

5.75% (see BOE Interest Rate Graph) which had an impact on banks that relied on lending as

their main source of revenue. Both Barclays and RBS started to show difficulties and had to

raise capital to protect themselves against shocks, not long after the government had to step

in and part nationalise RBS whereas Barclays raised funds from investors because the previous

capital raising effort where not enough as both banks had to make huge write-downs in

assets. Furthermore the general economy started to show signs of weaknesses and the

central banks had to lower interest rates, but soon found out that this was not enough then

had to resort to unusual monetary policies such as QE when traditional methods proved not

to work as interest rates dropped to unprecedented levels.

As can be seen from the interest rate graphs, the BOE and FED had used the management of

interest rates to curb inflation but also to stimulate the economy, however as the crisis hit in

2008 it was deemed necessary to slash rates to historical lows in 2009 as the recession hit.

This in theory allowed banks to make greater margins as they could gain access to cheaper

funds due to operating both in the US and UK markets, however this did not work and what

is interesting is that the 3 Month LIBOR rate in drops from around 6% in 2008 to 0.6% in 2010

and remains around this level until 2015 indicating that money is cheap for banks to lend and

borrow, however banks were not increasing their lending, particularly to SME’s. In addition

to this, what is interesting is that the funding for lending scheme initiated by the government

to help banks to increase lending seems to be used by banks to bolster their balance sheets

(possible due to the capital adequacy provisions) rather than used for its intended purpose,

which may explain a decrease in lending by banks in addition to restrictive lending policies as

general concerns over the economic conditions.


48

Figure 22: 3 Mont LIBOR from 2004 to 2015 (Global Rates).

Furthermore banks main activities is maturity transformation, where they borrow at cheap

rates and invest to gain high yield returns, but as Genay (2014) suggests “The economic

conditions and low interest rate environment of recent years have been challenging for banks

that rely on a wide spread between long- and short-maturity yields to generate earnings”, this

again adds evidence to the tough conditions banks have to operate in which again helps to

explain the poor performance since 2010 and further force banks to resort to other methods

of making revenue. Consequently this situation forces banks to invest in longer term loans as

they provide higher yields but has the added problem of increasing interest rate risk which

may lead to greater use in hedging. Conversely when the interest rates do eventually rise

borrowing rates will increase which may impact on their NIM, however as improvements in

the economy have become evident may mean higher demand in loans and will seep through

to increased revenues.

What is also notable is the fact that Barclays purchased assets from Lehman Brothers during

the crisis, helping it to grow its investment banking arm, which attributed to the majority of

its net income which was £13,057m in 2010 and has dropped to £7,602m in 2014 indicating

that it has been substantially reducing its focus on this area onto other aspect of its business,

which may reduce the banks focus on risk taking activities such as proprietary trading to other

less risky activities. However interestingly, Barclays move a large amount of its toxic assets

onto the SPV named Protium in 2009 which it brought back onto its books in 2011 suggesting

it may be using such SPVs to hide losses which is not truly reflected in its accounts and reports .

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What is evident is that it has reduced its employee count in its investment banking division,

similarly RBS investment banking arm Global Banking and Markets income was a large

proportion of its income which was £11,058m in 2009 to £4,292m in 2014 and has also

substantially reduced it number of employees in the bank most notably in its investment

banking arm, this is due to the fact that it has put in new management to oversee the

restructuring efforts and to try and reduce its global presence and to refocus on the UK

market. However, Barclays has been restructuring but not to the extent RBS has, its strategy

seems to maintain its global presence particularly expand into new markets (e.g. ABSA deal)

and to cut costs to make the bank more efficient.

As can be seen below stock markets recover from the collapse in asset prices, the FTSE 100

has returned to pre-crisis levels increasing by 62% from late 2008 to mid-2015, while Barclays

is trading at roughly a third of its pre-crisis levels but has increased by 76% over this same

period, RBS however is down by 37% over this period and trading at a fraction of where it was

at pre-crisis. What is interesting is how both companies track the FTSE 100 over this time

period, as both are still constituents of the index, whereas Barclays share price has

outperformed the FTSE, RBS however has underperformed against the benchmark.

Furthermore Barclays share price does look quite volatile in comparis on to the FTSE and RBS

has been quite stable indicating different drivers in the share price other than fundamentals,

most likely due to market sentiment and speculation. The explanation for the stability in the

share price of RBS post nationalisation is the fact that the government owns 81% indicating

that there is a small amount of free float shares and has the lowest level of free float shares

on the FTSE 100, furthermore the reason for it remaining in the FTSE 100 is due to its large

market cap and if it were to be dropped to a lesser index would skew the data.

There is also much debate over the rise in equity markets post crises, leaving many to believe

there is another asset bubble due to governments QE measures, which helps to explain the

increase in equities since 2008. This adds credence to the issue of banking cyclicality, what

may be occurring is that because of Barclays independence may be more prone to cyclicality

than RBS due to the nature of their situation. Barclays may be more short-termist in their

attitudes because of their independence, whereas RBS has the government as its majority


50

shareholder which may indicate that its influence may be having a far more beneficial effect

in the long term as it has a different view of its investment than regular investors would have.

Figure 23: Barclays, RBS and FTSE 100 Share Price 2008-2015 (Google Finance).

As can be seen from the graph below, Barclays operating revenue and operating expenses

have increased from 2008 to 2011 suggesting that it may have been performing well or it was

still artificially trying to show that it was performing well until it had to make substantial write-

downs in toxic assets up until 2012, where it made only £m 106 in PPOP. However this has

increased to £m 2692 in 2014 suggesting that it may be recovering and performing well as

economic conditions improved since both the credit and sovereign debt crises. Furthermore

its net interest income modestly climes from £m 11,469 in 2008 to £12,080 suggesting that it

has not increased the revenues made from loans, therefore any increases would have to be

explained from other trading aspect of its business.

The increases in operating expenses where due to the charges for litigation (e.g. provision for

litigation of foreign exchange manipulation in 2014 £m 1,250), regulatory penalties,

restructuring costs and banking levy and increased provisions due to interest rate swap mis-

selling and PPI mis-selling (total provision from 2011 to 2014 £m 5,220), however bonuses

and staff costs still remain high falling slightly from £11,916 in 2010 to £11,005 in 2014

suggesting that the attitude towards staff remuneration have not changed, particularly with

regards to its bonuses paid to its management and staff.


51

Figure 24: Barclays Operating Income, Operating Expenses and PPOP 2008-2014.

RBS share price has been affected by its lacklustre performance results as can be seen below,

where it made substantial losses in 2008 recovering in 2009 and then PPOP continues to fall

from £m 17,212 in 2009 to £m 114 in 2012, £189 in 2013 then increases to £m 1,291 in 2014

implying that since 2008 it has gone through considerable difficulties and changes but may be

on the mend as its operating revenue and operating expenses has remained relatively stable

since 2012. RBS net interest income has dropped considerably from £18,675m in 2008 to

£9,258m suggesting that lending over this period has plummeted and has failed to hit its

lending targets. This is further highlighted by its net interest income, as it has dropped from

£14,209m in 2010 to £9,258m, further indicating the decrease in the revenues made from

lending. Its staff costs have dropped from £9,671m in 2010 to £5,757m in 2014 which support

the massive restructuring and cost cutting measures that have been implemented since

nationalisation, however still maintained its high level of bonuses to staff post crisis even

though it has been performing poorly over this period suggesting its attitude towards bonus

culture may not have changed post crisis, but since the restructuring has reduced its

remuneration up to 2014 suggesting the nationalisation has had an impact on reducing risk

taking incentives.

Fines and penalties, have had an impact on their profits from 2012 onwards including losses

on Greek Debt as a result of the Eurozone debt crisis (cumulatively has paid £3.7bn in PPI

redress, £1.4bn in interest rate product redress, £2,050m for mortgage backed security

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litigation, Euro392m for LIBOR fixing, since 2012 paid £1,119m in fines relating for FOREX

manipulation ). RBS has made a loss in 2014 of £m 3,486 from its US banking division citizens,

which helps to explain the drop in operating income. Furthermore its PPOP has dramatically

deceased from 2009 to 2012 suggesting that the recent changes have impacted its

performance and this is also reflected in its stable but underperforming share price, however

since 2012 it has only marginally increased its PPOP compared to Barclays suggesting the

independence sought by Barclays has helped it to perform better than RBS in this time frame.

Figure 25: RBS Operating Income, Operating Expenses and PPOP 2008-2014.

As can be seen below, provisions jumped up for both banks for write-downs on loans in

addition to divesting of toxic assets post crisis, but since 2010 have dropped considerably

from £m 5,672 to £m 2,168 and for Barclays and from £9,256m to £8,432m in 2013 to a

positive figure of £m 1,352 in 2014 suggesting that RBS has gone through a substantial

restructuring of its loans in order to try and refocus the business. With regards to Barclays, it

still may be having write-downs on assets and loans but at a much slower rate than RBS

indicating that it might be moving some of these assets onto SPVs and not increasing its loan

portfolio.

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Figure 26: Barclays and RBS Provisions for Bad and Doubtful Debts 2008-2014.

As can be seen Barclays EPS has dropped considerably since 2008 where for two years it had

negative figures for 2012 and 2014 suggesting poor performance, whereas RBS EPS has had

negative figures for all but 2014. However what is important it the rate of increase of for RBS

where it has been gradually improving conversely Barclays has been declining, suggesting that

RBS performance may be improving and Barclays performance may be deteriorating over this

period.

Figure 27: Barclays and RBS EPS (Diluted) 2008-2014.

The figures for ROA and ROE continue to show a similar picture, as Barclays ROA slightly

increases from 0.16% in 2008 to 0.39% in 2010 but declines to 0.2% in 2014, its ROE drops

from 7.02% in 2008 to 4.08% again suggesting that its financial performance has weakened

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over this period, however both RBS and Barclays figures for 2012 where similarly poor in

comparison as difficult economic conditions have affected their profits. From 2012 onwards,

because of RBS restructuring and asset selloff has managed to increase its ROA from 0.009%

in 2012 to 0.123% in 2014, suggesting that it has been making better use of its assets. This

upturn is also reflected in its ROE from 0.75% in 2012 to 22.91% in 2014 further indicating

better performance over this period. Barclays figure show a marginal improvement over this

period with its ROA increasing from 0.007% in 2012 to 0.198% in 2014 and its ROE 0.17% to

4.08% in the same period suggesting a slight improvement in its performance but still very

weak.

Figure 28: Barclays and RBS ROA (Return on Assets) 2008-2014.

Figure 29: Barclays and RBS ROE (Return on Equity) 2008-2014

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From the P/E ratios of both banks there are some figures but Barclays figures from 2008 to

2011 increase from 2.5 to 6.8, no figure for 2012 and 2014 as it had negative EPS figures, RBS

last P/E figure is skewed by an EPS of 0.5. The current bull market, in which arguably equities

are overvalued and because of QE has overinflated asset prices which has an impact on

performance ratios (P/E Ratio).

Figure 30: Barclays and RBS P/E Ratio 2008-2014.

Barclays gearing ratio has decreased by 59% from 2008 to 2014, primarily due to the new

regulations implemented forcing banks to decrease their leverage such as the banking levy,

furthermore if a bank has a high amount of debt and the value drops significantly as they did

in the credit crisis this can have a detrimental effect on banks and financial stability therefore

Barclays has prudently dropped its gearing. However RBS gearing remains extremely high in

comparison but stays relatively stable from 2008 top 2012 but then increases by 49% from

2012 to 2014.

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Figure 31: Barclays and RBS Gearing 2008-2014

In 2013 Barclays and RBS are facing a capital shortfall and are trying various methods to raise

new capital as government are concerned that weak capitalised banks are not lending and

are making efforts for them either by themselves to raise capital or through existing

government schemes. This may help to explain the increase in RBS gearing ratio increase

from 2012 to 2014.

Barclays has had to restructure and write down much of its debt, and RBS has had to sell off

much of its assets such as the announcement in 2014 of its intention to sell off its US banking

arm Citizens bank in for 2015 for an estimated $3.7bn, however as the data collected only

covers up to the end of 2014 this is not reflected in the data. Furthermore in 2015 plans to

sell Coutts with a book value of $1.25bn, primarily due to the strategy of RBS to change its

image in the wake of so much fines and litigation with regards to wrongdoing within the bank.

Furthermore since Anthony Jenkins has taken over as CEO of Barclays, they have made effort

to increase their presence in developing countries such as the ABSA merger in 2012 for £1.3bn

which has helped it to diversify into new growth markets. This may help its future growth

and help it to diversify, but may also be worrying as if there is another financial crisis leading

to contagion developing countries banking systems may be greatly impacted than they were

from the previous crises due to the spread of SIFIs into such markets.

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s

RBS

Bar

clay

s

RBS

Bar

clay

s

RBS

Bar

clay

s

RBS

2008 2009 2010 2011 2012 2013 2014

Gearing


57

6.4) Overall

Since the implementation of the new regulation, (such as the deposit protection schemes,

banking levy, CRD IV, Banking Reform Act 2013 UK and the Dodd-Frank Act 2010 US), changes

in the regulatory bodies overseeing the UK financial industry (FSA now split into the PRA and

the FCA), with new vigour with regards to financial malfeasance and the fines and litigation

ensued there has undoubtedly been structural changes in the way UK banks now operate

particularly for those that were nationalised. From the results both banks have made

structural changes in the way the operate, however because of RBS nationalisation it is clear

it will never be the same bank again as the refocus of its strategy to the UK and sale of large

amounts of its assets. It is clear that from its performance there is no issue of moral hazard

from its bailout and nationalisation as the impact of its government ownership and chang e of

management have clearly done what they have intended to do, which is to make it a safe

bank not engaged in risk taking behaviour which it was clearly doing in the past. How much

the actions of its past will fully amount to will yet to be seen, but so far the changes with

regards to its situation and the new regulation has certainly proven that in this case safety

nets and government intervention may have worked.

In comparison Barclays seems to be making its own reforms and structural changes, but

because it was not nationalised it will not benefit from the drastic measures RBS has gone

through to make it a safer bank, which leads to another question, has it really changed enough

to allow it to be a safe bank as much as RBS.

From the regulatory standpoint, with the creation on the PRA with the aim to let failing banks

fail and not be bailed out or nationalised in addition to take preventative measures so that

such firms will not destabilise broader markets, if Barclays gets into trouble again because of

risk taking activities will it be saved because of its designation as a SIFI or will its independence

allow it to make its own changes that it believes are necessary rather than what the

government wants changed as in the case of RBS. Therefore time will tell if the PRA keeps to

its word when the next financial crisis occurs and banks such as RBS and Barclays who created

the problems are allowed to fail.


58

Furthermore, government’s charges for various support measures such as the FSCS (financial

services compensation scheme) much like the FDIC compensation scheme may have had an

impact on banks’ earnings but what in not clear if this has created moral hazard in the case of

these banks. But what is certain that initiatives such as the banking levy are having an impact

and may cause banks to rethink their position with regards to being situated in the UK if such

initiatives continue to hurt banks profit margins.

But as both banks have been embroiled in the LIBOR fixing scandal, FOREX rigging scandal

which has impacted on their profit margins and is unlikely to put to rest anytime soon, may

be distracting investors and are impacting on their share price because of market sentiment

and scandals, could help to explain the share price differentials. But as further scandals come

to light this will further hamper investors’ confidence in Barclays and RBS in addition to

hurting their bottom line. But what is evident is that Barclays intends to slim down its

investment banking activities due to external pressures and will to try refocus on its core

business, however as Barclays investment banking arm contributed a huge proportion of its

revenues a reduction in this may impact on its future earnings potential, but may

consequently reduce the risk of moral hazard and excessive risk taking within the bank, again

time will tell if they do this and how will this impact them remains to be seen.

7) Discussion

This section discusses the links between the research from previous studies highlighted in the

literature review to that of the findings of this paper, and further shows whether the results

provide further evidence to corroborate certain assumptions based on previous work.

Firstly, the main research questions; has there been an increase or decrease in shareholder

wealth and banking performance from 2001 to 2014, in addition to whether or not the issue

of moral hazard is evident from the events that impacted both banks post crises came from

the research by Hoque (2013), Beltratti and Stulz (2012), Demirguc-Kunt et al (2010),

Fahlenbrach et al (2012), Fahlenbrach and Stulz (2011) which looked at banking performance

of different banks over different time periods addressing similar issues while attempting to

explain certain outcomes from different variables.


59

The results do compare to the work of Hoque (2013) that banks performed better during the

sovereign debt crisis than the credit crisis. The research conducted by Beltratti and Stulz

(2012) also suggest that banks with increased Tier 1 Capital performed better during the

sovereign debt crisis may help to explain the performance results of both banks from 2010

onward. The impact of the new CRD IV which requires banks to hold more capital based on

BASEL lll have certainly caused these two banks to increase their capital buffers, however it is

too early to tell how this will impact their performance as the new regulation came into effect

in 2014.

As discussed in the literature review, Calomaris (2009) highlights that safety nets may increase

excessive risk taking and lead to moral hazard, but from the results it is dependent on what

safety nets are put in place and what restrictions are put on them. In particular whether the

level of intervention increases or decreases the performance of banks, which may be accurate

in the case of both banks, as Barclays performance has been better than RBS post 2012. The

findings and results are in line to the findings of Beltratti and Stulz (2012), because the higher

level of government intervention in RBS has led to poor performance post-crisis, however this

may be only in the short term as the results indicate an improvement in its performance since

2012 suggesting that the restructuring efforts have enabled it to refocus on its core business

and away from risk taking activities.

From the literature review, Calomaris (2009), Paolera and Taylor (2001) suggest lack of

regulation allows banks to take excessive risk and lead to distress and due to their nature

increases the propensity of financial crisis, the results show that this is the case for both

Barclays and RBS as their actions contributed to financial crisis as the necessary regulation

and oversight was not enough. Furthermore, because of the necessary actions taken by BOE

this help stave off further financial collapse in the UK by intervening in the bank, this is adds

to the argument that strong intervention is necessary as without it would lead to banking

collapse and prolonged the financial crisis, this is evidenced from the results as RBS that had

strong intervention and Barclays has not.

The government intervention in the case of RBS, had been forced to restructure, whereas

previous historical examples shows government intervention in the form of bailouts was not


60

enough and greater intervention in the form of nationalisation, forced restructuring (in

addition to regulation such as the Glass-Steagal Act been implemented) and forcing banks to

split the risk taking activities from its retail activates does show how effective such measures

are at preventing the likelihood of crises. This further contributes to the argument by

Friedman and Schwartz (1971), who suggested that the great depression lasted much longer

due to the lack of intervention, what is apparent from the results is that the actions taken

post credit and sovereign debt crisis particularly in the case of RBS have decreased the

likelihood of banking collapse.

The research by Fahlenbrach et al (2012) suggesting that the ego and hubris of senior

management contributed to banks problems is wholly evident from the res ults in both

Barclays and RBS with the spending binge on M&A’s up until the crisis and consequently have

had to sell off assets and have had to move a large amount of toxic assets from off balance

sheets in order to restructure their banks.

The issue of the prudential regulation post crisis is important as the new regulation

implemented in the case of BASEL lll (CRD IV, UK), may improve the stability of the banking

sector, but this will remain to be seen. What is also evident is that the increase in litigation

and redress has forced the two banks to adjust it attitude towards investment banking. But

again as Edwards (2000) indicates there still continues to be debate over regulation, because

there has been disquiet by some that the new regulations implemented are stifling the

performance of banks, as other major banks such as HSBC have hinted at relocating their

headquarters, which could be disastrous for the UK finance industry and the economy as their

contribution to tax and GVA is undeniable, and could possible mean others could follow.

Conversely, this may increase financial stability in the sector and may prove beneficial in the

long term, as banks that feel stifled by such regulation (obviously hint that they would like to

continue certain activities which is in their own interest rather than creating financial stability)

would move and continue such activities in different jurisdiction, however this may create

banking instability in the markets in which they operate in rather than the UK. This situation

also highlights the issue of regulatory capture and how important it is for standardised global

regulation to prevent the need for banks to move and operate in markets where there is lax

regulation, as they apparently feel this will impact their profits.


61

There is much academic debate over what is happening with the banks, some argue bailouts

and safety nets are beneficial and some argue the opposite as they increase the risk of moral

hazard and excessive risk taking. What is evident that the government intervention and

subsequent nationalisation of RBS may be a positive action to increase stability in the financial

system, but consequently has been disastrous for investors. This raises an interesting point,

does the stability of the financial system far outweigh the need for banks to provide

shareholders (who tend to want good returns year on year but suffer from short-termism)

increase in value, as this seems to be one of the factors that drive risk taking behaviour and

create problems, or to think about the medium to long term growth and the issue that global

financial stability might actually benefit everybody including shareholders and the banks.

Therefore it is in the interest of banks to stop such activities as they will only eventually

damage their business, their reputation and the profits.

Furthermore, the differential treatment of RBS and its nationalisation brings the issue of “too-

big-to-fail” as discussed by Haltom (2013) as the necessary action taken by government did

not occur, this would have further crippled and irreparably damaged the UK banking industry.

In addition, should the government stepped in to part-nationalise Barclays in order to help

clean up its house as it has done with RBS, this will yet to be seen as its own attempts of

restructuring have yet to full materialise.

Taking this view in the US, would it have been more prudent for the government to take

stricter action against banks, by taking equity ownership which would allow them greater

control and oversight into the activities into these highly secretive organisations rather than

providing them with just liquidity and implementing new regulation that may not

fundamentally change their risk taking activities. Interestingly, the US bailed out its banks

and actually made a profit because they gave them extended credit lines and put time limits

on repayments in addition to buying bonds. But have not forced them to radically change

their practices as the UK government has done with RBS by taking equity ownership. This sort

of action taken by government in the context of the results has shown that government taking

equity ownership in RBS has allowed for greater restructuring in a shorter time frame than a

non-nationalised bank as the non-nationalised bank is only interested in satisfying its

shareholders and to be perceived to restructure rather than the nationalised bank, which

does not worrying about its perception so much and focuses on its restructuring efforts. This


62

radical difference will eventually manifest itself in how both banks perform over the next ten

years as it is apparent that the rate and damage of financial crises has increased and from the

findings the refocus to core activities in the long term will eventually benefit RBS, the

economy and its shareholders as it has reduced activities which got it into problems in the

first place.

Finally, the results of the research further corroborate the evidence of Fahlenbrach et al

(2012) that the bonus culture in Barclays may not have changed post-crisis, suggesting the

lack of government intervention has allowed Barclays to continue impeded and not allowed

for a change in the internal culture of the business, which may be conducive for risk taking

activities to occur.

8) Conclusions and Recommendations

In conclusion, based on the findings it does suggest that RBS under the government’s

stewardship has been using its majority ownership to make considerable fundamental

changes particularly with regards to various issues, such as bonuses (BBC, 2012) and reduction

in its size as it intends for it to be a less risky bank. But this lies the problem, as it has shrank

so much will it ever be as prosperous as it once was and will the taxpayer get its money back,

well this will depend on how long the government intends on maintaining its ownership. This

unfortunately may mean logical and rational decisions with regard to its privatisation may be

more influenced by political factors rather than sound economic and investment factors.

Conversely, up till 2014 Barclays has not made such efforts to change staff remuneration,

which suggests even through the difficulties face post-crises its culture and attitude may not

have changed considerably. However, as new board has been put in place which proposes

restructuring and slimming down its investment banking operations, it may be too early to

tell how this will manifest itself and how it will have an impact on risk taking and creating

value for shareholders, this will eventually become apparent over the next few years as these

measures are put into place. How this will affect its profitability and the future growth will

remain to be seen, but what is apparent that its image has been severely damaged by certain

activities and is making a considerable effort at changing this perception, is this just rhetoric

or an actual genuine effort for change. What is guaranteed is that regulation is in the pipeline

to force 1st of January 2019 that will ring-fence retail and investment banking operations into


63

separate divisions, but has brought growing concern over it could harm the profitability of

banks and is unnecessary as banks have increased capital buffers as discussed by Noonan

(2015).

Because both banks have mad various restructuring efforts, and have shied away from

investment banking for obvious reasons, this has caused them to shed staff in these areas to

reduce costs. However investment banking is still an extremely profitable activity and what

is evident from recent news is that other banks that are not reducing such activities, such as

Deutche bank, will take the talent from these banks, which will mean such banks will increase

their investment banking activities. What is evident is such activities may go hand in hand

with speculation and excessive risk taking and may be one of the main problems with regard

to financial stability. Therefore in theory both RBS and Barclays banks may have reduced the

likelihood of moral hazard from excessive risk taking, but may have shifted it on to other firms

as they will fill the gap where Barclays and RBS were once were, and banks such as Deutche

bank will certainly increase certain activities as they increase their investment banking

operations to fill the niche. This will theoretically mean that the fundamental problems

associated with excessive risk taking and moral hazard have shifted from one firm to another,

therefore the likelihood of future crises may not be reduced as speculative activities may

increase as shareholders look for the constant short term growth they want and invest with

the higher yielding firms. This is where regulation is key, but also shareholders should try to

change their attitudes towards these kinds of activities as most investors are institutional

investors and do have a mandate for stable medium to long term growth of their own assets,

therefore in their own best interest should shy away from investing in firms that the majority

of their income comes from such activities, because this will eventually damage wealth

creation and may lead to another devastating financial crisis and contagion. The next crisis

may eclipse the recent ones, as the growth of banks is inevitable and what is apparent is a

worrying consolidation of banks over the past few decades through M&As as organic growth

is unfeasible for short term wealth creation that investors seem to constantly demand, this is

true and to the point as in the case of Barclays and RBS.

New financial regulations implemented are integral to the future successful performance of

banks, however what is evident that the amount of fines and penalties from illegal activities

that have come to the surface may only superficially and temporarily impact their revenues


64

and their behaviour. Because from previous highlighted historical examples have shown us,

cyclicality and political attitudes may sway regulators to de-regulate stating regulation has a

negative impact on the global economy because it hinders banks abilities to make profits etc.

But this would be a folly as evident from the past few years, because of the recent events

have come to light (rate rigging, manipulation etc.) these activities are certainly not a recent

phenomenon and who really knows how long these activities have been going on for and

maybe such activates will continue to be carried out as the pressure investors put on

management to make constant returns year on year will force some to cut corners or turn a

blind eye to certain activities, especially with the use of complex financial instruments.

Consequently, if we can learn anything from history, they will evolve and discover other ways

to increase their profitability as they have the ability to attract the best talent with the large

salaries and bonuses they offer, which in turn allows them to put these talented individuals

to work to create new innovative techniques and tools that allow them to cut costs and create

new and ever exotic ways to make money. Which leads to the problem of regulators are

always trying to catch up to the activities of banks, this may require a new relationship

between regulators and banks, a one of transparency not secrecy, in order to facilitate global

financial stability.

Therefore, the need for standardised global financial regulation that encapsulates all aspect

of banking from retail to investment banking so that banks cannot perform regulatory capture

is important, but also a legal and bureaucratic nightmare. However as financial institutions

grow and spread to all markets, this is inevitable, but institutions tend to move a lot quicker

than regulatory bodies are able to implement regulation as it seems they are reactive rather

than proactive in their efforts.

Furthermore, greater transparency of the accounts and reports of banks, more stringent

regulation regarding creative accounting practices may also help to foresee future problems.

In a recent article in the FT (2012)

“Barclays is among the least transparent companies in terms of its corporate reporting,

according to a ranking of the world’s largest publicly traded companies. Barclays is 71st out

of the 105 companies listed by Transparency International, a non-governmental organisation


65

that scored companies by how clearly they reported their corporate structures and their anti-

corruption programmes”.

However, RBS is ranks number 1 for transparency in corporate reporting according to

Transparency International (2014), indicating that the financial data for RBS is far more likely

to be an accurate representation of its performance as opposed to Barclays, which may be a

result of its nationalisation. This was also highlighted in a recent news article; “It has warned

that Barclays' method of accounting for its bonuses is "deficient" and is distorting investors'

views of bank's profits” (Wilson, 2011).

With regards to regulation; it is only after hindsight can the true effects of it can be seen, as

banks are at their very nature very complex and the world in which they operate in becomes

more complex. But what is evident is that there seems to be periods where regulation

becomes lax or deregulation occurs then there is a growth period and bubble, then it usually

come to a head with some sort of financial distress, in which banks are in trouble need to be

saved and this then has knock-on consequences for the global economy. This generally has

socio-economic problems for people and recession, then there eventually after investigations

public anger toward government and regulators that they did not do enough. Then comes

the impetus for new stringent regulation, in which government and regulators create new

policies and regulations in trying to tackle the reasons for why the banks got into trouble in

the first place, when these are implemented bankers and economists argue about the pros

and cons saying they damage the economy. Interestingly, it does seem from a long term

historical perspective, lessons learnt are only done so for a short period and the need for

economic growth may blind people to where this growth is coming from.

Furthermore, there has been many crises that have been caused or exacerbated by banks,

some of which lessons have been learnt and others not. There are many examples of banking

failure which has had a negative impact on domestic and global economy, however there are

other consequences to these crises. As never before since WW2 have people been affected

by economic austerity as they have recently, and there has been a lot of anger laid towards

banks, regulators and government that have done little about the problems that were caused

by these recent economic crises. What is evident that the certain issues have been

highlighted post crisis, particularly by various committees who suggest lessons have been


66

learned and changes will take place, but how much the financial system has changed in the

wake of the crisis may be too early to tell.

What is evident from the recent changes in the structure of regulation and the bodies that

oversee the financial sector, is that it has become apparent that risk taking behaviour,

particularly the activities which do not fundamentally benefit the bank in the long term, will

not increase shareholder wealth in the short, medium and long term as increased oversight

into their activities has become an important priority since the recent crises. Therefore in the

short term the new regulation implemented has had a massive impact on the short term

performance and it may be many years before both banks (if ever) return to the profits they

were making before these crises. But what is obvious is that the fundamental shifts away

from risky, speculative, greedy illegal activity has and will hurt the banks’ ability to provide an

increase in shareholder wealth let alone reduce the risk of further crises and possible financial

contagion.

In conclusion from an investment standpoint from the analysis, RBS would be a prudent

investment for the medium to long term, as its restructuring and nationalisation has

refocused and slimmed down its operations and when the government does decide to

liquidate its holdings it should at least break even, but also investors interests may spike the

share price due to speculation which may actually benefit the taxpayer as long as the

government acts prudently in its sale. However this should not be done until its fully carries

out its strategy of refocusing its business and the broader economy becomes much more

stable, as the overinflated equities market may be due to drop as they may not be

representing their fundamentals.

Barclays on the other hand could be argued that it too would be a good investment as its

share price has not yet reached its levels pre-crisis, however what should be noted that it has

not gone through its restructuring programme and depending on how the markets perceive

the actions the new board takes and how this actually manifests itself will yet to be seen, and

its share price too may not be accurately representing its fundamentals therefore could be a

very volatile stock to own in the short to medium term.


67

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73

10) Appendices:

10.1) Barclays Data from 2001 to 2007

2001 2002 2003 2004 2005 2006 2007

Operating Income 11325 11327 12411 13945 15762 19441 20205

Operating Expenses 6554 6624 7253 8350 10527 12674 13199

Pre-Provision Operating

Profit

4771 4703 5158 5595 5235 6767 7006

42.128

04

41.520

26

41.559

91

40.121

91

33.212

79

34.807

88

34.674

59

2001 2002 2003 2004 2005 2006 2007

Provisions for Bad &

Doubtful Debts

1149 1484 1347 1091 1571 2154 2795

Assets 35664

9

40306

6

44336

1

52208

9

92435

7

99678

7

12273

61

Debt 78924 94229 97393 12742

8

10332

8

11113

7

12022

8

Equity 3118 3133 7859 12166 24430 27390 32476

Share Price 512 355.64

2

460.25

6

541.31

4

564.40

8

674.33

4

465.56

7

2001 2002 2003 2004 2005 2006 2007

EPS(Diluted) 36.7 33.4 42.1 51 52.6 69.8 66.7

2001 2002 2003 2004 2005 2006 2007


74

ROA (Return on Assets) 1.3377

3

1.1668

06

1.1633

86

1.0716

56

0.5663

4

0.6788

81

0.5708

18

2001 2002 2003 2004 2005 2006 2007

ROE (Return on Equity) 153.01

48

150.11

17

65.631

76

45.988

82

21.428

57

24.706

1

21.572

85

2001 2002 2003 2004 2005 2006 2007

P/E Ratio (Price Earnings

Ratio)

13.950

95

10.647

96

10.932

45

10.614 10.730

19

9.6609

46

6.9800

15

2001 2002 2003 2004 2005 2006 2007

Gearing 2531.2

38

3007.6

28

1239.2

54

1047.4

11

422.95

54

405.75

76

370.20

57

10.2) Barclays Data from 2008 to 2014

2008 2009 2010 2011 2012 2013 2014



Pre-Provision Operating

Profit

3330 4337 5797 5913 106 2892 2691

2008 2009 2010 2011 2012 2013 2014


Doubtful Debts

5419 8071 5672 3802 3596 3071 2168

Assets 20529

80

13789

29

14896

45

15635

27

14903

21

13122

67

13579

06

Debt 14956

7

13590

2

15662

3

12973

6

11958

1

86693 86099

Equity 47411 58478 62262 65196 62957 63949 65958


75

Share Price 141.70

2

254.95

4

241.69

8

162.62

5

242.39

1

271.95 243.5

2008 2009 2010 2011 2012 2013 2014

EPS(Diluted) 57.5 81.6 28.5 24 -8.5 3.7 -0.7

2008 2009 2010 2011 2012 2013 2014

ROA (Return on Assets) 0.1622

03

0.3145

19

0.3891

53

0.3781

83

0.0071

13

0.2203

82

0.1981

73

2008 2009 2010 2011 2012 2013 2014

ROE (Return on Equity) 7.0236

86

7.4164

64

9.3106

55

9.0695

75

0.1683

69

4.5223

54

4.0798

69

2.4643

83

3.1244

36

8.4806

32

6.7760

42

-

28.516

6

73.5 -

347.85

7

TRUE TRUE TRUE TRUE FALSE TRUE FALSE

2008 2009 2010 2011 2012 2013 2014

P/E Ratio (Price Earnings

Ratio)

2.4643

83

3.1244

36

8.4806

32

6.7760

42

0 73.5 0

10.3) RBS Data from 2001 to 2007

2001 2002 2003 2004 2005 2006 2007 % +/-

Operating Income 14581 16815 19229 22745 25902 28002 31115 46.86

164

Operating Expenses 8367 9357 9381 10846 11946 12480 14435 57.96

328

Operating Profit

(calculated)

6214 7458 9848 11899 13956 15522 16680 37.25

42


76

42.61

71

44.35

326

51.21

431

52.31

479

53.88

001

55.43

175

53.60

758

2001 2002 2003 2004 2005 2006 2007


Doubtful Debts

984 1286 1461 1428 1707 1878 2128

Assets 36878

2

41200

0

45527

5

58346

7

77682

7

87143

2

19005

19

Debt 64040 67042 79949 91211 12096

5

12725

1

27642

7

331.6

474

Equity 1557 1886 2300 2960 9301 13504 53026 3305.

652

Share Price 1435.

682

1277.

95

1412.

49

1502.

7

1505.

274

1711.

476

381.0

93

2001 2002 2003 2004 2005 2006 2007

EPS(Diluted) 66.3 67.4 78.4 136.9 168.3 193.2 75.7

2001 2002 2003 2004 2005 2006 2007

ROA (Return on

Assets)

1.685

006

1.810

194

2.163

088

2.039

361

1.796

539

1.781

206

0.877

655

2001 2002 2003 2004 2005 2006 2007

ROE (Return on

Equity)

399.1

008

395.4

401

428.1

739

401.9

932

150.0

484

114.9

437

31.45

627

2001 2002 2003 2004 2005 2006 2007

P/E Ratio (Price

Earnings Ratio)

21.65

433

18.96

068

18.01

645

10.97

663

8.943

993

8.858

571

5.034

254

2001 2002 2003 2004 2005 2006 2007


77

Gearing 4113.

038

3554.

719

3476.

043

3081.

453

1300.

559

942.3

208

521.3

046

10.4) RBS Data from 2008 to 2014

2008 2009 2010 2011 2012 2013 2014



Operating Profit

(calculated)

-28165 17212 13640 10911 114 189 1291

2008 2009 2010 2011 2012 2013 2014


Doubtful Debts

-8072 -14950 -9256 -8709 -5279 -8432 1352

Assets 24016

52

16964

86

14535

76

15068

67

13122

95

10278

78

10507

63

Debt 26754

9

26725

4

21748

0

20908

0

15743

8

11359

9

86649

Equity 26330 19528 22198 15183 15232 8811 5635

Share Price 49.4 29.2 39.07 20.18 324.5 338.1 394.4

2008 2009 2010 2011 2012 2013 2014

EPS(Diluted) -145.7 -6.3 -0.5 -1.8 -53.7 -81.3 0.5

2008 2009 2010 2011 2012 2013 2014

ROA (Return on Assets) -

1.1727

3

1.0145

68

0.9383

75

0.7240

85

0.0086

87

0.0183

87

0.1228

63


78

2008 2009 2010 2011 2012 2013 2014

ROE (Return on Equity) -

106.96

9

88.140

11

61.446

98

71.863

27

0.7484

24

2.1450

46

22.910

38

2008 2009 2010 2011 2012 2013 2014

P/E Ratio (Price

Earnings Ratio)

0 0 0 0 0 0 788.8

-

0.3390

5

-

4.6349

2

-78.14 -

11.211

1

-

6.0428

3

-

4.1586

7

788.8

2008 2009 2010 2011 2012 2013 2014

Gearing 1016.1

37

1368.5

68

979.72

79

1377.0

66

1033.6 1289.2

86

1537.6

93

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James MacLeod Nairn MSc Dissertation