RBS recovery "ahead of schedule"

12 January 2010

The chief executive of Royal Bank of Scotland (RBS) says the beleaguered bank's recovery is ahead of schedule - with the worst of its heavy losses now behind it.

Stephen Hester told the Treasury Select Committee that the group is more than two thirds of the way through shrinking its balance sheet amid its renewed focus on its core operations.

Its investment banking division is now around half of the size it was a year ago both in terms of its balance sheet and the capital held.

"The investment bank is a very important and very profitable part of what we do, but it is much smaller and indeed much safer than it was a year ago," he says.

Meanwhile, Hester believes the bank's far-reaching restructuring is beginning to pay off.

"We are well ahead of where I thought we might be," he adds. "That gives me encouragement to believe we can hit all the ambitious targets we put out for the recovery of RBS. I don't think we will make more losses like have already been made."

RBS is now looking to exit the government's toxic debt insurance scheme - under which it has insured £282 billion of toxic loans - within the next three years without having used it.

"We regard it as unlikely for RBS to call upon the scheme," Hester says. "It is there as sort of a rainy day scheme whereas when it was first conceived it looked likely that we would need it and I hope, and it's our ambition, within the next two or three years we will be able to exit the scheme altogether without ever having used it."

With the recovery underway, Hester hopes the government will be able to sell of its holdings in the coming years.

"I would be hopeful that there will be a number of opportunities for share sales to be made at a profit over the next three to four years," he explains.

Bonus furore

The topic of banking sector pay once again reared up ahead of the annual bonus season.

Hester insists that his pay packet was worth next to nothing - despite admitting his parents think he is overpaid. He told the MPs he asked to be paid the "going rate" when he took over the top job at the beleaguered bank in October 2008.

His controversial pay deal, which is potentially worth £9.6 million over three years, is linked to the RBS share price which is currently hovering around 35p.

Under his share reward scheme he is only allowed to sell his shares in 2014 if the share price rises to at least 70p.

Hester claims his pay packet is currently "worth very close to nothing because the share price has not risen".

However, he adds that he understood the public backlash against high pay levels within the sector: "If you ask my mother and father about my pay, they'd say it was too high, as well, so some people close to me have that view of bankers."

Hester also struck out at the growing "politicisation" of the bank following the government intervention on banking sector bonuses.

"If we get to the point where we can be confident the banks are not going to be calling on the public purse and assuming that the market is getting better, which it is, then I think banker's pay becomes a matter for the private sector again," he says.

He adds that retaining and motivating good people was his "single biggest problem at present" and claimed that the bank, which is 84% owned by the government, is paying out the "minimum we can get away with in the marketplace" to key employees.

With bonus season fast approaching, Hester remained tightlipped on the bonus pool for 2009, which is estimated to be around £1.5 billion. Although a handful of RBS staff are in line for cash bonuses due to previous legal commitments, those earning more than £39,000 will only receive payment in shares.

However, he denied media reports that the board of the bank had threatened to walk out following the introduction of the bonus caps and played down fears that the City will lose its status as a financial services centre amid the government's 50% tax on bonuses.

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