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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