Do Customer Complaints Matter for a Bank's Outlook?

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According to data released by the Financial Services Authority (FSA), The Royal Bank of Scotland ( RBS ) Group ( RBS ) received 53,806 customer complaints in the second half of 2010. This includes customers of its banking, insurance and investment businesses. Notably, Barclays ( BCS ) - one of RBS's biggest rival in the UK banking industry - recorded 276,315 complaints for the same period; almost 5 times the figure for RBS. Beyond Barclays, RBS also competes with other worldwide banking institutions and financial services group like Citigroup ( C ), Bank of America ( BAC ), UBS ( UBS ) and JPMorgan Chase (JPM).

Our price estimate for RBS stock stands at $13.43 , in line with market price.


But Don't Customers Complain All the Time?

The FSA data shows that a total of 1,795,182 financial sector-related complaints were received from July to December 2010. That is an average of almost 10,000 complaints per day. While complaints certainly vary in degree, the rate is noteworthy nonetheless. On top of that, the FSA obtains information about the number of complaints from the firms itself. So the level of transparency that the firm decides to provide in its disclosure likely has an affect on the accuracy of this data.

RBS was Recently Cited for Poor Customer Complaint Handling

In January this year, RBS's UK retail banking division and its subsidiary, NatWest, was fined £2.8 million ($4.5 million) by the FSA for lax treatment of customer complaints. The fine was imposed when FSA concluded that RBS delayed responding to customer complaints and did not mount adequate investigations to address the complaints.

Does this Really Matter?

Poor customer service can dent a firm's brand, driving new customers (and also dissatisfied existing customers) towards competitors. Tying this back to RBS, the effect could emerge in growth prospects for the company's UK retail banking division.

We estimate that the value of RBS' credit card, mortgage, and other outstanding loans in the UK will grow by about 5% annually over the coming years, driven by an expanding customer base. However, should customer concerns mount, this could be one area that might see an impact.

While we do not believe that the FSA data poses any material threat to our base case estimates, we offer the following scenario to illustrate the sensitivity of RBS' stock value to consumer loans outstanding. Should this annual total remain flat at around $160 billion going forward (vs. our base case forecast of 5% annual growth), it would imply 6% downside to our $13.43 price estimate for RBS stock.

Let us know your thoughts. Do customer complaints matter for a bank's outlook?

See our full analysis and $13.43 price estimate for RBS



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: BAC , BCS , C , RBS , UBS

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