Martin Flanagan: Hester’s close to fulfilling his own prophecy

By MARTIN FLANAGAN
Published on 26/09/2012 00:00

ROYAL Bank of Scotland boss Stephen Hester’s claim at a London banking conference that the group is “nearing the point of becoming a recovered bank” looks more than wishful thinking.

There is substantial evidence for it, even with the complications of the various regulatory probes, from Libor-rigging to hedging products mis-selling, that RBS faces and the likely financial fallout from them.

Underlying profitability has already been achieved at the bank that, back in the financial crisis of 2008, was one of the three big universal financial organisations effectively bailed out of bankruptcy, along with UBS and Citigroup.

That profitability has not translated to the bottom line so far because the money has gone over the past couple of years on cleaning up the toxic corners of the RBS balance sheet.

The group has made strong progress in this regard, getting rid of well over £20 billion of non-core assets that were largely amassed in Hester’s predecessor Fred Goodwin’s ultimately star-crossed trek to flag-planting glory.

The retrenchment has been extensive, with just a few examples being getting out of Bank of China, retail and commercial banking businesses in the likes of Hong Kong, Indonesia, Singapore and Taiwan, and selling the Sempra metals and energy trading arm. Investment banking has been sharply cut back from its high water mark within RBS. Hester can also point to a core tier one capital ratio – the capital reserves a bank has to back up its loans – of about 10 per cent. At the time markets froze up five years ago and we flirted with financial apocalypse, RBS had a string-and-sticky-back tier one capital ratio of a little over 4 per cent.

The RBS chief executive indicated yesterday that the restructuring of the bank should be largely complete by the end of 2013, after which the “milestone” of restoring dividends to shareholders should become a realistic prospect. That landmark will truly signal RBS’s return to normality and would be particularly welcome to the UK government, which still sits on billions of pounds worth of losses on its 82 per cent stake following the taxpayer bail-out.

Such an outcome in that timeframe, which at this moment looks feasible, would also show Hester to have been prescient in predicting back in 2008 that it would take up to five years to complete the recovery.

Clegg’s ‘big idea’ that exudes sheer daftness

I CAN’T express the facile daftness of Lib Dem leader Nick Clegg’s plan for parents to use their pensions to put grown-up children on the housing ladder better than City guru Terry Smith yesterday. So I won’t try.

Smith, admittedly never knowingly emollient, hits the nail on the head. “Nick Clegg… has apparently come up with the brilliant idea that we should allow parents and grandparents to use part of their lump sum from their pension to pay the deposit on their children’s property purchases.

“Since they can in fact give the cash they take out tax–free to whomsoever they choose, I take it his actual ‘idea’ (I use the term loosely) is to give them some tax incentive to do so.

“The ‘idea’ of people who mostly already have inadequate pension provision using part of it to give their children a stake in what are almost certainly still over-priced houses in the UK beggars belief.” Enough said.

Battle of Britain spirit is sadly lacking here

IS IT my imagination or has the politics-beset BAE Systems/EADS merger proposal come to resemble a badly shot-up Spitfire trying to pull off an emergency landing somewhere in Kent?

The British group bailed out of EADS some years back to bet heavily on American defence only to see stateside programme cuts make a balanced defence/civil aerospance business model seem better. But combustible political complications surrounding the defence sector could easily see this deal derailed.