Osborne reveals strategy disagreements with Hester and team

By:
Peter Lee
Published on:

Even internal RBS candidates might not want the worst job in banking after the chancellor’s Mansion House speech.

Morale at RBS has been hit by news of Hester’s demise. Insiders thought the bank had concluded its strategy review through a series of meetings and communicated it internally in the days leading up to his removal.

Hester even gave an interview to the FT the weekend before saying how much he looked forward to running the bank towards privatization. So the news came as a surprise.

And while RBS bankers resent chairman Philip Hampton, the man now charged with finding a successor, for not standing up to Robin Budenberg – the head of UKFI, the body that manages the UK government’s shareholdings in RBS and Lloyds – when he put through his fateful call on Hester, the bigger question is: what was the latest disagreement about?

At a previously scheduled investor presentation at a Goldman Sachs FIG conference on the day after the Hester news broke, Bruce van Saun presented the strategy that the RBS bankers thought had just been confirmed.

This included the latest vision for the split of earning between retail and commercial, set to comprise 80% of the RBS business and a further slimmed-down markets business focused just on FX, rates, DCM/credit and asset-backed. It is set to provide 20% of profits.

The UK and non-UK balance had been set, with Citizens in the US scheduled for only a partial IPO in late 2014 or early 2015.

Chancellor George Osborne, in his speech at the Mansion House a week after Hester’s departure, seemed to call all this into question, while painting RBS as a laggard in its restructuring, damning Hester with faint praise.

He said: “While the bank is healing, let’s be frank: it has not healed as quickly as we all hoped. It has not done as much to support the recovery as any of us would have liked.”

He declared: “RBS will focus on its core UK business, serving its personal, SME and corporate customers. It will not aspire to be a global full-service investment bank, and the ongoing reduction of its markets business will continue, as it needs to.

“And UKFI have made it clear that the government has no strategic interest in RBS owning one of the largest regional banks in the US – and the method of exit from Citizens must achieve maximum value for all shareholders.”

Does that mean Osborne and Budenberg want a full exit from the US, then?

Osborne raised once again the idea of splitting RBS into a good and a bad bank, even after years of managing down non-core assets.

It’s perhaps understandable for UK taxpayers to want the bank they rescued to concentrate its energies on lending at home, but lack of lending in the UK is as much due to the scarcity of creditworthy borrowers wishing to fund expansion through bank loans as to a lack of desire among banks to put their replenished liquidity to work in earning assets.

It’s also worth asking whether, from a shareholder and creditor perspective, some diversity of earnings and exposures would be more preferable. There’s an instructive comparison with France’s national champion, the very well-run BNP Paribas.

It is using its restored capital and liquidity to expand in Asia, where it sees more chance of growth than in the eurozone. It’s an open secret that BNPP’s next announcement will be for expansion in the US, where it rejected advice to sell BancWest in the depths of the crisis and will instead build organically on a bank operating in 19 western and midwestern US states, in a resurgent US economy.

As to the markets division, which Osborne seems to suggest should shrink further, it might be a mistake to do this. As banks shrink, SMEs will fund through the capital markets, and having the capacity to arrange such finance bolted on to a corporate banking franchise might make RBS more useful to customers and valuable for shareholders.

Ian Gordon, analyst at Investec, says: “Since RBS failed in 2008, the UK government has repeatedly made a bad situation worse. It overpaid for its stake, it has imposed ‘moving goalposts’ in terms of the regulatory framework, triggering five years of costly rolling- restructuring. Such inconsistency/mismanagement has hurt shareholder value.”

In the wake of Hester’s removal, the share price fell from 327p to 319p in two weeks, outstripping the rate of decline in the FTSE. Analysts fell over themselves to put out on sell notices. “As an 81% shareholder, the UK government reaps what it sows,” says Gordon.

And Gordon was even more damning on Osborne’s revival of talk of splitting RBS into a good bank and bad bank. “We thought he recognized that with only £52 billion of residual non-core loans, there is little point.