Finance

Banks are the largest financial institution for century, and banks have enjoyed financial growth for several decades.  Financial capacity of some banks is more than overall resources of some countries such as Gambia or Guinea. For example, most banks in the UK enjoyed rapid growth where the FTSE 100 index recorded increase from 2003 to 2007. Typically, between 2003 and 2007, many banks in the UK declared surplus dividends to their shareholders. However, since 2007, many financial institutions in the UK are facing financial turmoil, and many big banks announced that there was scarcity of liquidity at their disposal. With reflection of this, FTSE index started to show negative sign of downward returns since 2007. (See fig 1 for the FTSE 100 banks index ).         

However, with the negative decrease of FTSE 100 index since 2007, the   Royal Bank of Scotland (RBS), which had enjoyed positive increase since 2003 till 2007, started showing negative downward in the price index between 2007 and September 2009.
The objective of this report is to provide relevant causes of the downward decrease in price index of RBS between 2007 and September 2009.
To demonstrate the causes of the downward trends of price index of RBS, this report employs factors such as the collapse of   Northern Rock effect of bankruptcy of Lehman Brothers, Government policy and economical market.

1.1 Overview of Royal  Bank of Scotland
Royal Bank of Scotland is a British government largest bank. The bank started its operation in 1727, and since the inception of its operation, the bank has enjoyed a leading position in the banking sector in the UK.  Apart from the UK, RBS is one of the largest financial institutions in the world with capitalisation of 44.4 billion. Apart from having corporate headquarter in Edinburgh in the UK, the RSB also operates in US, and other international markets through other subsidiaries such as Citizens bank in the US, which is one of the largest bank in the US. Typically, since its operation, the RBS has enjoyed buoyant financial position.  The total assets of RBS have reached approximately 1,900.5 billion with total equity reaching 53.0 billion.  Meanwhile, the banks RBS provides different services in its business activities.  Apart from providing personal and corporate banking, RBS also provides risk management services and debt financing  to different corporate organisations worldwide. Through range of services provided, the bank has distributed service networks, which include money transmission, savings, mortgage, and loans to individual, small, medium and large corporations around the world.  (Annual Report and Account, 2008).
For several decades, the RBS has enjoyed rapid financial growth. Analysis of financial reports of RBS revealed that since 2003, the RBS enjoyed rapid increase in price index between 2003 and 2007.  However, from 2007 to September 2009, RBS suffered from downward trend in the price index. What are the causes of this decrease in the RSB price index between 2007 and September 2009. This report analyses several factors that might lead to the decrease in the price index of RBS.

1.2 Analysis  of  factors responsible for the decrease in the price index of  RBS between 2007 and September 2009.
Scholars and economist analysts have provided different factors that might have led to the downward trend of the price index of RBS between 2007 and September 2009. Yorulmazer (2009) argued that the spill of Northern rock financial crisis led to the fall of   major banks in the UK including UBS.
Northern Rock Financial Crisis  Northern rock was the fifth largest mortgage providers in the UK. Since 1997, the Northern rock enjoyed rapid growth till 2007. Thus, in 2007, Northern rock recorded large fall out when the effect of sub-prime lending that led to the collapse of many mortgage banks and commercial banks swept to the UK. The dry up of liquidity  of many mortgage banks in the US through sub-prime lending affected Northern rock where  Northern rock  closed some of its financial activity  including   providing long term loan in mid 2007.  To come from its financial turmoil,   Northern rock asked for bail out from Bank of England, which was granted on the 13 September 2007. The news that the Northern rock had faced liquidity crisis swept like fire, and the effect of the news had caused panics in the mind of the UK population, other investors around the world. Thus, the financial crisis that faced Northern rock had a spill over to major banks in the UK. Meanwhile,   between September 14 and September 17, top 10 banks in the UK started recorded abnormal negative returns on the stock prices. It should be noted that these top ten banks in the UK formed 90 of total banks asset in the UK. Thus, with collapse of Northern rock, all these top 10 banks   started recording negative returns. Moreover, the FTSE share price index also recorded decrease in price. The RBS being one of the top ten  banks in the UK recorded  negative returns of  -0.7 in September 14 and -4.3 in September 17.(See table 1 for the returns of FTSE and top ten banks in the UK in September 14 and 17 2007). (Yorulmalzer, 2008).
Table 1 Returns of FTSE and major banks in the UK between September 14 and 17 2007
                                   
FTSE and top 10 banks in the UK14 September 200717 September 2007Abbey -0.7-1.0AL -6.9-31.3Barclays -3.1-2.5B  B-7.7-15.4HBOS-3.6-5.5HSBS0.20.7Lloyds-2.7-1.3NR-31.5-35.4RBS-0.7-4.3SC-1.4-1.7FTSE -1.3-1.7
Source (Yorulmalzer, 2008).
Apart from the collapse of Northern rock that that led the decrease of   FTSE index and decrease of RBS price in 2007. Another major event was struck in the USA, which affected the FTSE index and the price of RBS. The bankruptcy of Lehman Brothers in 2008.
Bankruptcy of Lehman Brothers Apart from the financial crisis of Northern rock in 2007, another major event that led to the collapse of many financial institutions worldwide was the news of bankruptcy of Lehman Brothers.  In 2008, the Lehman brothers sent a wave of shock to the financial circles around the world when the Lehman brothers declared bankrupt in  2008. The action of Lehman Brother sent a wave of shock to the financial institutions in the USA and the UK. The major reason for this shock was   that Lehman Brothers Holding Inc was one of the world leading global financial institutions.  Before Lehman brothers was declared  bankruptcy in 2008, this  financial institution had  participated in many major financial deals which included investment management, investment banking, private banking, and so on. Lehman Brothers was the major dealer in the market of U.S Treasury securities.  Apart from Lehman Brothers Inc and Lehman Brothers Bank, this financial institution had many subsidiaries, which included SIB Mortgage, FSB etc.
Apart from its major operations in the United States, the Lehman Brothers Holding Inc had offices around the world, which included Tokyo and London. Meanwhile, in August 2008, the Lehman Brothers Holding Inc declared bankrupt with debt that worth 613 billion, and bonds debt that worth 155 billion. (Mamudi, 2008).
Meanwhile, the collapse of Lehman brother was recorded as the biggest collapse of a financial institution after 1930 great depression. Thus, the effect of this collapse swept panic to the mind of investors around the world, and it led to rapid decline of shares of several financial institutions. For example, in the UK, the index of FTSE 100 fell by 212.5 points, and there was decrease in price index FTSE 100 by 4. (The Times, 2008).
With the collapse of Lehman brothers, many investors in the UK disinvest with major banks. During this period, Royal Bank of Scotland suffered dramatic lost in share prices. For example, the shares price of RBS fell by 13 in mid September 2008, and the overall results led to the decrease in share prices of RBS   in 2008.  (Malhotra,2008, Harrison, 2008). Apart from the collapse of Northern Rock and Lehman Brothers. The analysts also argued that economical market  also lead to major decrease in FTSE price index and consequently decrease in the prices of RBS.
Economical market The UK economic market has recorded significant decline in 2007. It should be noted following the effect of credit crunch that have affected the US economy where there was  fall of several mortgage banks due to the sub-prime lending. The UK economy was affected by the effect of credit crunch. For example, major economic market of the UK economy crashed because of   the effect of credit crunch.  Walayat (2007) argued that there was a major rash in the UK house market between 2007 and 2008, and there was fall of the UK banking sector. For example, the stock price of many UK mortgage banks fell by more than 50.
Fig 2 The share  price of Royal Bank of Scotland Group  between 2006 and 2009

                                        INCLUDEPICTURE httpmorningstar.timesonline.co.uktimesonlineimagescharts16chart.png  MERGEFORMATINET
Source The Times, 2009
In addition, the Royal bank of Scotland recorded losses 1.6 billion in 2007 as a result credit crunch. (Business Scottish, 2008).
Thus, the effect of this cumulative effect led to the loss of confidence on the part of investor, and the result led to the drastic decrease in the price of RBS between 2007 and September 2009.
It should be noted that before 2007 only few people had ever heard the word credit crunch. Thus, the aftermath of credit crunch, there was financial crisis facing many top banks around the world. (BBC News, 2009).

However, not all the factors enumerated above led to the decrease in the price of RBS. The government policy has also had major impact on the price of RBS.
Government policy the government was controlling the major shares of the RBS. Typically, the government controls 68 shares of the asset of   RBS. Thus, with the major control on the bank, the RBS may not be free to make initiation regarding the investment that may be profitable to the bank. Moreover, many investors might have the belief that the privately owned banks might perform better than the government control bank. 

This report provides the picture of the decrease of FTSE 100 price index between 2007 and 2009.  Moreover, the report shows that the decrease in the price index of the FTSE 100 affected the price of Royal Bank of Scotland between 2007 and September 2009. The report discuses several factors that led to the decrease in the price of RBS between 2007 and 2009. One of the major factors that led to the decrease in the price of RBS was the collapse of Northern Rock in 2007 that swept the panic to the mind of major investors in the UK. Moreover, the report also reveals that the collapse of Lehman brothers in 2007 which was one of the biggest financial institution in the world. Apart from the two major factors, the UK economic market and government policies also affected the decrease in share prices of RBS from 2007 to September 2009.


Despite the   major crisis facing the banking sector in the UK, the Royal Bank of Scotland remains one the biggest bank in the UK.  For example, the report published by the Business Scotsman (2008) revealed that RBS recorded 10.3 billion in 2008. In 2007, which was the start of the banking crisis, RBS recorded 9 rise in annual net profit.  The chairmans statement also revealed the positive performances of RBS
    RBS enjoyed another successful year in 2007 despite some of the most challenging market     
      conditions in the financial and credit markets for some time. The hard work of our
     employees allowed us to deliver a strong financial and operational performance as well as
     successfully completing the acquisition of ABN AMRO, the largest banking acquisition
     ever undertaken. In 2007 the Groups total income grew by 11 to 31,115 million and
     operating profit increased by 9 to 10,282 million , with adjusted earnings per ordinary
       share rising 18 to 78.7p. (Mckillop, 2008,  p1).
Thus, the report argues that the decrease in the whole price index FTSE 100 and decrease in the price of RBS are not the overall decrease in the performance of RBS.
This report enhances the greater understanding of the financial investors, banking organisation, academic community and private individuals.