Barclays drops more than 10% after Libor scandal, with other UK banks also hit

The fallout from Liborgate is continuing, with all major UK banks now seeing their share prices crumble.

Barclays has lost 19.85p at 176.2p - a decline of more than 10% - after it admitted manipulating interbank interest rates, but paying a fine of £290m and making executives give up their bonuses may not be enough. Barclays boss Bob Diamond is under pressure to resign, and there are calls for a possible criminal investigation. Other banks could well be dragged into the mess, which has hit the whole sector.

Royal Bank of Scotland is down 16.6p to 216.5p, Lloyds Banking Group is off 2.035p at 29.12p while HSBC has fallen 15.3p to 557.7p. Even Standard Chartered, which has not been linked with the scandal, is down 23p at £13.52.

Between them they account for around 26 points of the FTSE 100's current 49.52 decline to 5474.40.

Analyst Sandy Chen at Cenkos looked at US precedents, including a case filed by Charles Swab, and said:

We expect that the costs of lawsuits related to Libor manipulation will dwarf the £290m in fines imposed on Barclays – and since RBS, HSBC and Lloyds have also been named in lawsuits, we expect they will also face significant fines and damages. We are pencilling in multi-year provisions that could run into the billions.
Barclays have said that circa £100m had been set aside in the first quarter of 2012 as provisions against Libor-related cases, covering roughly one-third of the fines. But given Barclay's £35.5trn in notional interest rate derivatives (fair value assets of £373bn) reported as at end-2011, we think they will need several multiples of this to cover the lawsuits. We could imagine that one way of calculating relief/damages would be to estimate what Libor might have been without the manipulation and then aggregating the difference. The Charles Schwab complaint outlined a methodology of comparing the bank's Libor quote with some market-based yields and CDS spreads, and it estimated that Libor quotes were understated by 30-40 basis points in some cases. As a simple example, if 5 basis points of Libor mis-pricing could be shown over the four years that the Libor investigations covered, 5 basis points x £1trn of notional contracts x 4 years = £2bn in potential damages. If these were covered by the US Sherman or RICO Acts, the damages/relief could be trebled. Obviously, although the exact amounts are unclear, we believe that the potential provisioning could run into the billions of pounds – we are revising forecasts accordingly. The precedent has now been set for the other UK banks (except for Standard Chartered which was not named in the investigations or lawsuits that we have seen). One of the best proxies for relative potential exposures is their disclosures on interest rate derivatives. As at end-2011, RBS reported £39trn notional, £422bn fair value assets in interest rate derivatives; HSBC reported $19trn notional, $513bn fair value assets; and Lloyds reported £2.1trn notional, £43bn fair value assets. We maintain our sells on Barclays and RBS, and we downgrade our recommendation on Lloyds from hold to sell because of HBOS' exposures. We are reviewing our recommendation on HSBC awaiting more information about their involvement.