TSB's bungled migration to a new computer system in April locked 1.9 million customers out of their online accounts, prompting outrage on social media and forcing managers to answer questions in Parliament. The issue had still not been fully resolved by May 21, with the Daily Mail reporting that fraudsters were taking advantage of the chaos to raid customer accounts, and The Guardian writing that many remain unable to access accounts and make payments.
Heather Anson, a law consultant at specialist firm DigitalLaw UK, said the legal and financial fallout for TSB could be high due to potential regulatory fines and customer lawsuits.
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"There are a lot of factors in here: You've got regulatory, you've got civil matters, you've got the loss of customers because you've got banks actively trying to lure away their customers," she told S&P Global Market Intelligence.
She estimated the bank may have to pay out between £20 million and £35 million in the next six months — a figure that could rise to as much as £200 million or £300 million in the next two years, depending on the length of civil suits and the nature of deals with regulators.
In 2012, Royal Bank of Scotland Group PLC suffered an IT meltdown that led to it paying out £70 million in compensation to customers and a regulatory fine of £56 million.
Beyond possible regulatory and customer redress costs, Anson said Sabadell shareholders may also make a case for compensation if they can demonstrate that the company's shares fell because of the IT issues.
She added, however, that Sabadell is lucky new EU rules on data protection are only coming into force May 25. Companies breaching rules under the General Data Protection Regulation can face fines of up to 4% of turnover.
Damaged brand
When TSB was acquired by Sabadell in 2015, it was using the legacy IT systems of former parent Lloyds Banking Group PLC. Sabadell said it could save £160 million annually by moving TSB to its own Proteo system, but the migration, scheduled for November 2017, was pushed back to early 2018.
Given that Sabadell paid a premium of almost 30% in its £1.7 billion purchase of TSB, the ongoing IT problems could call into question its reasoning in acquiring the U.K. bank as a growth driver, said Daniel Lacalle, chief investment officer at fund manager Tressis Gestión.
"The longer it takes, the more difficult it will be to justify the hefty premium paid and the multiples they expect to achieve in terms of growth because the brand [is suffering]," he said. "And in banking, the brand is everything."
Javier Santacruz, an economist at the Instituto de Estudios Bursátiles in Madrid who specializes in research on the Spanish banking sector, said the meltdown had demonstrated the difficulties facing Sabadell in the highly competitive U.K. market, at a time of already-high uncertainty with Britain poised to exit the EU.
"The operational risk could have too high a cost for Sabadell's reputation, for Sabadell's growth in the U.K. and especially the possibility of making a great business there," he said.
Santacruz estimated that the meltdown could cost Sabadell between €80 million and €100 million, based on potential operational costs related to IT issues, the loss of high-margin fee and commission business, and an exodus of customers.
TSB CEO Paul Pester told the U.K. parliament's influential Treasury select committee May 2 that the bank would waive overdraft fees for April at a cost of £10 million. The bank has also raised interest rates on one of its current accounts to 5% from 3%.
Share price pressure
The IT woes have rattled investors, with Sabadell's shares falling more than 4% on May 16 after RBC Capital Markets downgraded the bank to "Underperform" from "Sector perform," driven by the TSB problems.
RBC cut its 2020 profit estimate for Sabadell by 13%, with TSB's estimated profit contribution falling to 10% from 21%. It estimates the financial impact of the IT failure at £67 million based on fee waivers, the rate rise and a potential fine.
Sabadell may now decide to take more control of its U.K. operations by replacing Pester and his management team with Spanish executives, Santacruz said. DigitalLaw UK's Anson concurred that heads may have to roll to mitigate damage to TSB's reputation.
"It's always the person on the top," she said, adding that even if the CEO had no way of understanding the ins and outs of the IT system, "it was still under his watch."
What is particularly damaging for TSB, which began life as a savings bank in Scotland for agricultural laborers two centuries ago, is that it has built a reputation as a friendly, approachable lender.
"It has cut right across their values and what they have told people that they stand for," Jonathan Hemus, managing director of crisis management consultancy Insignia Communications.
"They have lost a lot of trust from their customers and that will take a long, long time to rebuild."