Stephen Hester bullish on RBS’s recovery despite half-year losses of £1.5bn

By MARTIN FLANAGAN
Published on 04/08/2012 00:00

ROYAL Bank of Scotland boss Stephen Hester yesterday attempted to placate critics by insisting his five-year restructuring plan remains on track.

He said the bank, 82 per cent owned by the taxpayer, had “undergone huge change for the better” as it continued to tackle the legacy issues of the Fred Goodwin years and become a “safer and sounder” business.

Despite reporting a £1.5 billion pre-tax loss for the half-year, trading performance was robust. Underlying half-time operating profits fell slightly from £1.97bn to £1.83bn in a tough economic climate.

Hester said: “We can take some comfort from the fact that we did not expect the world to be as bad as it is but we remain on course on our clean-up of the bank. We launched our plan to change RBS in 2009 and it continues to deliver good progress along the path we set out.”

He said the recovery plan was about both “physical and cultural change”. It has forecast headline profitability by 2014.

And he added: “We also achieved an important milestone in completing full repayment of the huge liquidity support given to RBS by public authorities during the crisis. We navigated eurozone problems and a credit rating downgrade from Moody’s with no slippage in the balance sheet resilience painstakingly rebuilt in the first three years of our plan.”

He insisted that lending to businesses was rising and said the bank was the first to access the new Funding For Lending scheme.

The bank hopes to exit the asset protection scheme, the government’s insurance over toxic debts, by the end of the year, freeing up £500m a year.

Bad debt charges fell 34 per cent to £2.7bn as lending practices became safer, while the core tier one capital ratio – reserves held by the bank – rose from 10.6 per cent to 11.1 per cent.

A blot on performance was the high street banking division, which saw profits fall to £914m from £1.05bn as tough economic conditions reduced demand for unsecured lending.

Net interest margin – the difference between the money the bank makes on lending and pays on deposits – came under pressure, falling to 3.59 per cent from 4.06 per cent. Investment banking profits fell to £1.07bn from £1.35bn in difficult financial markets during the continuing eurozone crisis.

There was a recovery in the US banking business, however, spearheaded by Citizens on the east coast. Divisional profits rose to £331m from £237m in the gradual US economic upturn.

Hester stressed RBS’s commitment to Citizens, amid some speculation it might be for sale.

He said: “Citizens is much more valuable to our shareholders today than it was three years ago [at the start of RBS’s five-year turnaround programme]. I expect it to be more valuable to them in three years’ time.”

He admitted the sale of more than 300 branches to Santander, ordered by the European Commission in return for the taxpayer bailout, may slip due to complexities in the deal.

Hester said the parties were “working in earnest” to resolve technical issues, but when asked whether it would mean a reduced price would be paid for the assets, he replied: “It’s hard to know where that ends up.”

Analysts praised the resilient underlying performance of RBS, saying that was more important than the headline £1.5bn pre-tax loss.