The five hurdles Hester must clear
STEPHEN Hester, the chief executive of Royal Bank of Scotland, might need cheering up after the failure of the £1.65bn branch sale to Santander over the weekend. Fortunately for him, consolation is on its way, as RBS is about to break the shackles of the government Asset Protection Scheme (APS) that insured a large chunk of its toxic loans, possibly as early as today.
It all sounds rather geeky. Arguably, though, the APS exit is a much bigger milestone than the Santander branch sale would have been.
When the bank signed up to the APS, the UK taxpayer was underwriting nearly £300bn of toxic assets – a truly terrifying figure.
RBS did not use the APS cover, which cost it £2.5bn. It will be left with £112bn of toxic assets after it quits.
The hope is that the bank will make its escape this week, since if it goes beyond that, it will rack up additional fees at a rate of £1.36m a day.
It is true that jumping free of the APS is a landmark for the bank on its tortuous journey to recovery. An optimistic Hester even declared last month that it is on the way to becoming a ‘good’ bank, whatever that might mean.
Before that, though, he has five big hurdles to clear.
One is to sort out the disposals ordered by the EU as a condition of its £45bn of state aid.
The offloading of Direct Line is already underway, albeit in a float that valued the insurance business at well below initial hopes. The fate of the 316 branches rejected by Santander is unclear.
Options include extending the deadline for shedding them, a sale to Virgin Money or private equity baron Christopher Flowers, or a sale under the Williams & Glyns banner – along with an outside chance the EU will let RBS hold on to them.
The second hurdle is to sort out the problem businesses. A sale of the Citizens division in the US is thwarted for the time being, as we reveal on Page 66.
Ulster Bank is a major problem, and likely to remain so for a generation, such is the extent of the bad loans on its books.
With little chance of a buyer for the troubled Irish offshoot, Hester has no choice but to try to run down the bad loans over time.
As for the investment arm, GBM, it has already shrunk from 47pc of operating profit in 2007 to less than 20pc now, but may have to shrink further.
The third hurdle is capital, which will need to be strengthened to comply with new post-crisis requirements.
Exit from the APS is a positive marker, as the bank would not be allowed to take this step were its core capital not deemed strong enough. RBS says fresh capital raising is not on its horizon, despite warnings from FSA chairman Lord Turner that banks may need stronger buffers. The fourth hurdle is the dividend. Hester needs to extricate himself from an obligation to give the government priority on divis.
That sounds like another bit of geek-ery, but it is important: removal of HMG’s rights over the payout is understood to be a requirement of Middle Eastern investors before they would be prepared to take a stake.
Last but not least is reputation. Having been dragged through the mire over the computer systems meltdown, interest rate swaps and PPI, the bank still faces a couple of big hits.
It is likely to suffer a heavy fine for Libor rate-rigging, in the region of the £290m inflicted on Barclays, plus a probably smaller penalty for money-laundering breaches in the US.
MUCH of the £500m saved on the APS, in other words, could walk straight out of the door in fines. Big bonuses are out for the foreseeable future, as Hester now accepts.
He has made good progress on a number of fronts, but the bank is falling short where it really counts.
The bottom line is still firmly in the red and the share price, though trading in line with other banks, is still feeble.
Ultimately, his ability to rehabilitate the bank and get it out of government hands depends on factors beyond his control including the health of the UK economy and the state of the eurozone.
Hester is attempting one of the biggest resurrection jobs in corporate history. No one would begrudge him a bonus if he succeeds – though it may take him rather longer than he thought.