They’re at it again. The banks are being naughty.
Last week, New York’s Department of Financial Services uncovered evidence suggesting the banks may have developed algorithms to manipulate foreign exchange markets.
Specifically, there are now media reports that Barclays (LSE: BARC) (NYSE: BCS.US) may have been using an automated currency rigging system. So not only was it rigging the currency market, but it had automated trading systems in place to take advantage of the subsequent price movements.
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It’s like having your cake, eating it, and then buying another cake.
The banks have a history of misbehaving
In June 2012 Barclays was fined £290 million after some of its derivatives traders were found attempting to rig the London Interbank Offered Rate (LIBOR). The scandal led to the resignations of Barclay’s chief executive, Bob Diamond, and chairman, Marcus Agius.
Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) was also caught out manipulating LIBOR. As if that wasn’t enough, during the financial crisis the Bank of England offered extra cheap loans to banks for a fee. The central bank was trying to help the tax-payer funded banks to ‘move on’. Do you think they said, ‘thank you’? I don’t think so! Lloyds actually tried to manipulate repo rates to reduce those fees. The bank was effectively abusing a scheme that had been set up to try and help it.
Mind you, Royal Bank of Scotland (LSE: RBS) isn’t exactly innocent either. It failed to stop its traders from manipulating foreign exchange rates from 2008 until October 2013.
The consequences
The major high-street banks have already been punished and fined for their involvement in the LIBOR rigging scandal. Barclays had to pay £290 million, Lloyds coughed up £218 million to British and American regulators, and RBS was fined £390 million for its part in the scandal.
So, naturally, if any evidence of wide-ranging currency rigging is found today, it could well mean higher fines for the banks involved.
Given then the high street banks’ willingness to take risks (even after being slugged with a fine), it doesn’t — prima facie — seem to me that the fines make any real difference to the banks’ earnings or how investors feel towards the banks (especially if all the banks are in on it together). Or is there an impact?
Market reaction
Let’s look, for example, at the share market returns investors have received for each of these banks over the past 12 months. Lloyds is up over 0.5% for the year, Barclays is down 8.5%, while RBS is up 18%. Clear as mud? Well it’s actually pretty straight forward.
The reality
You see, Royal Bank of Scotland has soared because it recently posted a pre-tax profit of £1.27 billion for the three months to September. That’s considerably better than the £634 million loss it posted in the same period last year. The bank also continues to benefit from the improving UK and Irish economies.
Barclays, on the other hand, just can’t get its act together. Even at the end of last week the share price fell over 2% after it was revealed the bank had been hit with a $5 million penalty by US regulators for breaching conflict of interest rules. To cut a long story short, Barclays’ analysts had been handing out favourable research reports about the company Toys ‘R’ Us in return for a role on the retailer’s float in 2010.
There are also a few weak spots in Barclays’ accounts. The bank’s latest interim results show a significant recent reduction in the bank’s investment banking business and a 4% drop in overall income to £18.6 billion.
The bottom line
While many of Britain’s big banks have misbehaved, and then been slapped with fines, the reality is that some banks have tried to clean up their act and have successfully turned their businesses around — and the market’s rewarded those stocks. Remember the market’s not necessarily looking for big profits — though that is encouraging for longer-term investors — it’s far more interested in growth in profits. I think the fewer the amount of trading scandals, the better.
