Bill Jamieson: Seat at the table and a brand-new charm offensive

Published on Thursday 11 June 2009 21:51

A "SMALL and informal dinner" was the wording of the discreet invitation from the Royal Bank of Scotland to St Andrew Square on Tuesday to meet chief executive Stephen Hester.

"Small?" The loud buzz of conversation on the staircase to the first floor reception belied any sense of intimacy. In one of the most powerful dinner gatherings of the year, Hester had brought together some 35 leading figures in Scottish business, finance and public affairs. The prestigious list included top civil servant Sir John Elvidge, enterprise minister Jim Mather, CBI Scotland chief Iain MacMillan, head of Scottish Enterprise Lena Wilson, head of the financial services industry advisory board John Campbell, Scottish Chambers of Commerce director Liz Cameron, Reform Scotland chairman Ben Thomson and leading figures from legal and accountancy firms and Edinburgh City Hall.

That the bank was able to hold such a gathering at this stage was astonishing. Just a few months ago Royal Bank of Scotland was a shattered wreck. Its share price had collapsed, its continued existence made possible only by a massive injection of taxpayer capital and its former chief executive, having once collected every business award and gong going, was denounced and reviled.

Whatever attempt the bank might make at rehabilitation seemed a long way off and certainly not on any business calendar this year or next. Who dared to think even a few months ago that the bank could embark this soon on the long and rocky road of reputational recovery?

But how life has moved on from the black days of last October. Hester has wasted no time in establishing his authority and imposing his own style. He has moved more quickly than most expected to clear out the board and bring in his own team. The bank is, of course nowhere near "back to normal" : not in its ownership, share price, balance sheet or lending policies. But the dinner was a critical marker to the Scottish establishment that RBS has moved on from the panic and funk stage at the depth of the crisis when there was real fear over a systemic collapse in the banking system and all that this would have triggered.

This was the first of several positive points Hester was able to make. The bank has held on to customers in key areas and not suffered a business defection. And wider credit conditions are gradually moving towards normality. All this – and a signal of reassurance of his awareness of the bank's Scottish history and heritage – made for the easy part of his message. Altogether more difficult to signal was his concern on two fronts, the speed at which RBS is likely to move free of taxpayer life support – three to five years – and the strength of the current improvement in the broader economy.

On that gaping spectrum that differentiates the position of Bank of England governor Mervyn King (blowing ice cold on recovery talk) – and that of Chancellor Alistair Darling (the recession will be over by Christmas) Hester is in the King camp and he fears that the current signs of bottoming out may prove a false dawn.

Given what transpired in the wake of the bank's previous outburst of optimism, a dampening caution on everything now is understandable. But there are plenty of signs – including new construction orders in the three months to 1 May down 38 per cent on a year ago – that recovery is far from a done deal.

Some business attendees, while warmly welcoming the effort to reconnect, felt the occasion was too diffuse to raise specific concerns over the parallel universe that many companies now feel themselves to be in.

Official policy rates are down at 0.5 per cent. But firms are being quoted rates for loans of 5-7 percentage points above LIBOR, while banks are also slapping on high arrangement fees and other costs.

RBS has given a commitment to provide 25 billion of new borrowing. But in the words of one business leader, "the companies that want it can't afford it and the ones that can don't want anything to do with borrowing." Quite how it will shift 25 billion of lending is unclear.

Said another, "There is a great deal of talk around about how much the banks have available to lend. But the killer point is the terms at which finance is being made available to business."

After an hour and a half presentation others were unsure what the key messages were or what sort of vision the new RBS board had for the future. "It was like a Chinese meal", said one, "I ate a lot but didn't feel full up".

And said another, "I didn't detect much light at the end of the tunnel, and that tallies with our own view. It's not just small and medium sized firms that are having problems with bank loans, but large corporates, too."

I understand the plan is to hold a series of such briefings with business customers over the coming months. Smaller groups, with a more specific focus on business concerns, would seem to be the preferable route forward.

As for RBS itself, the shares have rallied from the hope-abandoned level of 10p to which they sank in January. They are back up at 39.7p. That is little comfort to tens of thousands of small investors. This time a year ago they were changing hands at 242p and even that seemed a bargain basement price compared with the pre-credit crisis era. Ironically, one of the reasons for their better performance in recent days is a suggestion that the government may be able to sell its RBS and Lloyds Banking Group shares through exchangeable bonds at a profit. RBS is considered the most likely candidate because the shares are not far off the government's break-even price of 51.2p.

For now, the bank's glory days are well behind it, and further shrinkage of the balance sheet is required. Hester's open style and readiness to connect are big improvements on what went before.

However, while the dinner marked the end of the worst, the feast of sustainable recovery still looks way over the horizon.