Banco Sabadell Begins to Pay the Price for TSB’s Self-Inflicted IT Fiasco

The horribly botched IT upgrade hits the income statement.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

Spain’s Banco Sabadell on Friday announced a second-quarter loss of €139 million, including costs of €203 million related to the IT fiasco at its British subsidiary TSB. Those costs included €40 million euros from fraud losses and €92 million euros to cover future customer claims. The income statement reflects a 51% drop in results from financial operations, as well as a 10% increase in expenses (due to the TSB-related costs).

The deterioration in the bank’s performance was reported in as positive light as possible, both by Sabadell itself and by Spain’s financial and general press. In just about every single national article (here’s an example from El Pais) on Sabadell’s losses the word “losses” is conspicuously absent. Instead, the focus is on the bank’s “first-half” results, that net out the loss in Q2 with the profit in Q1, and so these “first-half profits have decreased by 67% in the three months from April to June.”

This desperate attempt to obscure reality didn’t stop investors’ from immediately dumping Sabadell’s shares, triggering a 7.3% plunge in its share price in early trading today.

Sabadell’s stock has lost almost 25% of its value since TSB’s self-inflicted IT nightmare began on April 19. To try to stem, or at least slow, the rout, Sabadell has sharply increased its purchases of its own stock, despite receiving a €1.6-million slap-on-the-wrist fine from the ECB earlier this year for doing just that. By mid-July, it bought back 1.1% of its total outstanding shares.

Sabadell also reported a 5% increase in provisions, for cleaning up toxic real estate assets. Those assets were reduced by €7 billion in the second quarter after Sabadell sold 80% of €9.1 billion of impaired real estate assets on its books to PE firm Cerberus. The lion’s share of the losses racked up from the discount sale of those assets, inherited by Sabadell from its shot-gun acquisition of bankrupt savings banks during the Spanish banking crisis, will be borne by Spanish taxpayers.

The question now is to what degree Sabadell’s latest provisions, worth just over €200 million, will cover the total costs of the IT debacle at TSB, which was recently branded the “biggest IT disaster in British banking history.”

The prime cause of all of this mayhem was Sabadell’s decision to migrate all data from TSB’s old IT system to Sabadell’s new system as quickly as possible, in order to save millions of euros in monthly fees it was having to pay to TSB’s former parent company, Lloyds Bank plc, to use to use its old IT system (our articles on this fiasco). Technicians working for IBM, the firm appointed by TSB to identify and resolve its IT problems, reported in a brief presentation recently released by MPs to the public that they had seen no “evidence of the application of a rigorous set of go-live criteria to prove production readiness.”

A source close to the matter told WOLF STREET that IBM’s estimate of the cost of rectifying the issues and accounting errors was £955 million ($1.26 billion). This excluded the fraud instances as they are not regarded as being part of the IBM remit, and are being treated as a normal banking function of fraud prevention.

The source, whose statements could not be independently verified, told WOLF STREET that the migration was started before the final Lloyds backup runs were complete and verified; and given the time gap between the “last known good” backup and the cumulative transaction data to date, TSB was told that there is no question of a roll back, even if Lloyds would agree, which they have indicated is out of the question.

We won’t know the full extent of the cost of Sabadell’s disastrous migration of TSB data from Lloyds’ system to its own until much further down the road, and more hits to future  income statement are likely to come.

But TSB’s IT woes are not the only problem the bank currently faces. There’s also its outsize exposure to Italian sovereign bonds, which will lose the support of the ECB, as it will taper and then end its QE program by the end of this year. At last count Sabadell had €10.5 billion invested in Italian bonds — the equivalent of almost 40% of its entire fixed asset portfolio, worth €26.3 billion, and 110% of its tier-1 capital. In other words, the pain for Sabadell has begun and it’s unlikely to end for a while. By Don Quijones.

Contracted to fix the fiasco, IBM estimates costs at $1.25 billion: sources. There’s even talk of divorce, after just 3 years of corporate marriage. Read…  What IBM Said about the IT Chaos at UK Bank TSB and Owner Sabadell, Now in its 12th Week  
 

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  20 comments for “Banco Sabadell Begins to Pay the Price for TSB’s Self-Inflicted IT Fiasco

  1. Bob edwards
    Jul 27, 2018 at 11:53 am

    What I don’t understand is when they took over Lloyd’s bank international in Spain 4 years ago every think went very smothly as far as I could see so I find it hard to understand why this went so badly .

    • Javert Chip
      Jul 27, 2018 at 6:56 pm

      Obviously not a whole lot of transparency in this fiasco, but a combination of all of the following have probably contributed to this laughable (if you are not an account holder or investor) example of banking amateur hour:

      1) Software systems require massive accumulation of management & technical “tribal knowledge” & a lot of this expertise appears to be missing (this is critical when quick or massive IT changes are required)

      2) Bank executives are clueless about technology (fatal leadership flaw when your organization is materially dependent on technology)

      3) IT management failed to require and/or enforce system implementation test & success criteria (this is pure & simple simple IT management incompetence)

      4) Regulators have been laughably ineffective; this clown show has no adult supervision.

      5) Any retail customers remaining with this siding ship are simply getting what they deserve.

  2. Petunia
    Jul 27, 2018 at 2:13 pm

    I’m glad for IBM. I hope they cash the checks before this ship sinks.

    • Old Engineer
      Jul 27, 2018 at 2:24 pm

      Petunia,
      The sad thing is that the ship won’t sink, since it is a bank. Even if run by Bonnie and Clyde (like Wells Fargo) or by the Three Stooges (like Sbadell and TSB) the governments will transfer enough money to the banks to keep them afloat. It’s pirate capitalism at its most egregious, Capt. Hook would be proud.

      • Javert Chip
        Jul 27, 2018 at 7:05 pm

        I agree the ship won’t sink, but it’s unclear “pirate capitalism” (eg saving money) is the proximate cause – this is a toxic mix of incompetent executive management & irresponsible IT management that should have never been given control of a multi-billion dollar institution.

  3. Covey
    Jul 27, 2018 at 2:27 pm

    From The Times of London…”Mr Pester said TSB had followed an “extremely well structured process” in the run up to the IT migration over the weekend of April 21 to 22, which included several board meetings in the week and then a final one on the Sunday, in which the board decided to formally proceed. TSB’s board was unanimous at all of the meetings, he added.”

    What the CEO is saying is that the Board finally gave the go/no go decision to migrate the whole of the Banks data just 24 hours before the doors opened for business on Monday. (Monday was not a Bank Holiday!!).

    Those of us you used to earn our livings by running migrations of Exchange etc for large companies know that on average it takes 30% longer to restore data than to back it up. Most of us running large migrations ran them when the Monday was a Bank Holiday or ran them over Xmas/New Year when transaction traffic was muted and there were lots of days off. 24 hours was a ludicrous target to complete the migration and have the clients up and running for 9am Monday morning.

    • Unamused
      Jul 27, 2018 at 3:37 pm

      The get-it-done-fix-it-later paradigm. If they really cared about the customer they’d send them somewhere else.

      Customer service: “Because we’re not satisfied until you’re not satisfied.”

      • Caliban
        Jul 28, 2018 at 12:14 am

        In the Aerospace Industry we have a saying,”You want it bad, you get it bad. The worse you want it, the worse you get it.” This applies equally to commercial software and database projects, too.

        By the way, in my experience most “technology company” executives are politicians, are totally clueless of how their company operates and are in general technologically incompetent.

      • sierra7
        Jul 28, 2018 at 10:10 am

        True.
        Money dealings is not about the “customer”. It is almost always about greed. When “greed” and the “customer” targets clash, greed almost always wins out. This story is sickening. But, not unusual. Many decades ago I was involved with the introduction of the grocery scanning systems. There was a dictum (referring to another commenter about the executive suite attitude towards hi-tech introductions) that said, “when the system crashes, which it inevitably did repeatedly in the early days, the first thing you do as the operator is lock the facility (store) manager in his office so he can do no harm.”
        Looks the same today.

    • Javert Chip
      Jul 27, 2018 at 7:15 pm

      Hopefully, its obvious that this was not a ” ‘extremely well structured process’ in the run up to the IT migration”.

      This has the hallmarks of people mis-reporting status to a group of senior decision-makers who had no clue what they were doing. These empty-suits then authorized slamming the broken system into production.

      It is simply inconceivable that a pending debacle of this magnitude failed to evidence several project-stopping red flags.

  4. Unamused
    Jul 27, 2018 at 3:28 pm

    IBM does not solve IT problems unless they have to. None of the big contractors do. They milk them. They cannot even solve their own problems.

    ->“biggest IT disaster in British banking history.”

    There have been others, not so well publicized. They are not merely common. Disasters are the industry standard for several reasons, for the most part related to hubris and greed. IT engineers are tedious and expensive, and the egos involved are immense. High-level decisions are made by people who have no idea what they’re doing. Testing is tedious and expensive, and TSB didn’t want to be bothered by the cost or the time needed, and the executives don’t want to hear from the experts, and certainly not about Best Practices. They want to make money, now.

    Case in point: security problems are practically universal, and are almost universally accepted as normal, until now dealing with IT security has become another major industry, feeding off the miseries of its parent industry.

    The first moon landing was nearly aborted, literally at the last minute, because of a computer failure, with an absolute absence of any operational structure to deal with computer issues. There was no software: machine instructions were built into the actual hardware. They got lucky, and it should not depend on luck. Forty years later the Obamacare rollout was an utter catastrophe and cost billions to fix because it simply wasn’t ready for primetime, and they knew it. There are thousands of examples, big and small, just about everywhere.

    If you want a reliable system you assign your best people to break it. Then you fix it. They break it again. You keep fixing it until your best people get frustrated trying to break it. Then it’s ready. Nobody does this anymore. Certainly not TSB. The people responsible knew full well the system was broken when it was deployed. They made no effort to do it well. They didn’t care.

    There’s never enough money to do it right the first time, but there’s always plenty of money to do it over. TSBs problems will end up costing many times more to patch than they saved by premature deployment. In desperation they’ll spend more millions to replace the system, and that one will also be screwed up for the same reasons.

    TSB and Sabadell would be a good ones to short. They’re going to have expensive problems for years to come. Others lurk in the high grass.

    • Covey
      Jul 30, 2018 at 1:13 pm

      “IT engineers are tedious and expensive, and the egos involved are immense.”

      Steady, I resemble that remark!!!

  5. Bob
    Jul 27, 2018 at 3:46 pm

    Well I just spoke to a well known uk bank and they told me. We don’t monitor traffic on our sites. ( not tsb) unbelievable so when there site went down and they thought it still worked they had no idea who was. On line. And we have to trust they’d people with our money

    • Javert Chip
      Jul 27, 2018 at 7:29 pm

      Difficult English text to decipher, but also a difficult statement (“We don’t monitor traffic on our sites” to accept a face value. Day-in and day-out operation of a large on-line environment (eg: ATMs, web site) is everything but impossible to run without constant 24/7/365 monitoring.

      • Bob
        Jul 28, 2018 at 1:29 am

        Well that’s what they said to me
        What happened was I could not get on there web site
        Spoke to someone at the bank
        He could not get on so he reported the fault and they said. No fault at our end. So they carried out a investigation and said. No we had no fault. So I asked them can you not check the traffic on the site between the times I gave you. And they said. Sorry we have no way of checking for traffic. Which I find hard to believe But that’s what they said

        • Jul 28, 2018 at 8:48 am

          Bob,

          You need to understand the ground rules of corporate problem solving with the public: deny, deny, deny… even the obvious.

        • Javert Chip
          Jul 28, 2018 at 11:39 am

          Over & above what Wolf said, bank tellers have no idea what network monitoring is occurring.

          An unmonitored network would probably cease to function in about 24 hours (or less).

  6. Steve clayton
    Jul 28, 2018 at 3:39 am

    Hi DQ, Just read Sabadells financials talk about trying to make good news out of a poor set of results with one line on the TSB migration. I’d love to know how many people have left TSB due to this.

    • L Lavery
      Jul 28, 2018 at 3:46 am

      According to this article[1], “The bank said that about 26,000 customers closed their TSB account in the second quarter of the year. However, it added that more than 20,000 customers opened a new bank account or switched their account to TSB in the same period.”

      Not sure sure how reliable those figures are, coming from the TSB.

      [1] https://www.bbc.co.uk/news/business-44978503

  7. Covey
    Jul 30, 2018 at 1:34 pm

    “The overall gross book value of the real estate assets involved in the Transaction amounted to approximately €9.1 billion, and their overall net book value amounted to approximately €3.9 billion.”

    The Sabadell accounts do not mention the price Cerberus actually paid for the impaired property assets they bought from Sabadell. The above statement from Sabadell shows that the assets had already been written down by 58% and Cerberus has a reputation for not overpaying for distressed assets.

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