Announcing the second biggest loss in banking history would mean the sack for most executives, writes Terry Murden. But RBS's Sir Fred Goodwin may have pulled off...
THE multi-national press corp that trooped into the towering London head office of the Royal Bank of Scotland provided a clear reflection of how the company had been transformed from its days as a provincial bit-player in the financial services indus
try.
As chief executive Sir Fred Goodwin faced the ranks of journalists seated in the theatre-style conference chamber he was aware that any careless words could have worldwide implications for a business already mired in the biggest banking crisis for a generation.
Goodwin knew he was under immense and unparalleled pressure to explain the black hole in the bank's accounts arising from the credit fallout and to justify why he should continue to lead the company.
That morning, the bank had announced a £691m half-year loss, its biggest ever, concluding a week of heavy profit falls among its rivals. Goodwin looked sheepish as he listened to his chairman Sir Tom McKillop admit "we are all deeply disappointed to be announcing such results and apologise for the pain this has caused our shareholders".
If there was any consolation it was that the loss was not as big as feared, allowing the shares to tick up and giving some grounds for optimism. Some were even suggesting that the worst may be behind not just RBS, but the whole banking sector.
Merrill Lynch, the City investment bank, had predicted a deficit of as much as £1.7bn. But with the figures more benign than any of the forecasts, it looked as if RBS had escaped the worst and that Goodwin would be let off the hook.
In a note issued after Friday's results, Merrill's analysts joined a number of others in a more upbeat assessment of the figures and RBS's prospects based on a better performance in the US, Asia and the insurance division. The underlying profit was healthier than predicted, and exceptional items lower.
Analysts at Citigroup noted that the statutory loss was 40% ahead of both its forecast and the consensus and that the picture was even better on an underlying basis, reflecting a strong operating performance.
What particularly caught the City's eye was the improvement in capital reserves. The core Tier 1 ratio of 5.7% was ahead of Merrill's expectation of 5.2% and the bank said it was confident of pushing it above 6% by the year end.
Unusually, the bank made its full presentation to analysts available to the media. Internal advice to the board was that full transparency was the order of the day. With the figures proving better than feared, it was also judged to be in the bank's interest to prove it had nothing more to hide.
But as finance director Guy Whittaker tirelessly worked through every statistic, the restless hacks wanted to get on to the key questions: would anybody resign over the loss? Was the bank making progress on integrating the parts of Dutch bank ABN Amro that it acquired last year? Would bonuses be shelved?
As McKillop blew the whistle on a 90-minute press conference it had truly been a game of two halves. After the sombre opening remarks, accompanied by overhead charts detailing the full, sorry story, the question and answer session was dominated by a strong defence of the company's tactics in taking a "quick and prudent" response to the crisis and its generally robust trading performance.
With Angel Trains and the Tesco Personal Finance joint venture bringing in £1bn, Goodwin shrugged aside the lack of action on further asset disposals, particularly the insurance division – Direct Line and Churchill – stating that "we do not have a deal but do believe we will get a deal at an acceptable price", adding that "it may take weeks, it may take months" and indicating that he was not overly concerned about the timetable, more about getting the right deal for shareholders.
Of particular interest to investors was progress on the integration of ABN Amro, acquired last year in a three-way consortium with Spanish giant Santander and the Belgian finance house Fortis. Goodwin appeared to light up as he reported plans to be slightly ahead of schedule. So he might. The £49bn acquisition was controversial from the start, representing an apparent U-turn on Goodwin's pledge not to make further big purchases. As he ploughed on with the deal through the early days of the credit crunch, analysts began to worry about his strategy and how the sums would add up. Memories were rekindled of the "megalomaniac" tag attributed to him by one banking analyst as Goodwin appeared to be on a personal crusade.
On Friday he spoke about making a "lot of progress" in separating the businesses and the sizeable contribution it would make to group profits. With the balance sheet strengthened by the record £12bn rights issue, and borrowings reduced, Goodwin focused heavily on the restoration and growth story, while admitting that the credit crunch would continue to impact for some time and the bank's loss was a blow he had taken personally. "I am very disappointed. I am numbed by it. I am also galvanised by it," he said. "We do not enjoy being in this place but we do have a business that is strong and resilient."
McKillop's most awkward moment was responding to calls for restraint at the next bonus round. "The remuneration committee will deal with that at the year end," he said, adding under pressure of persistent questions "that we will take the full year's numbers into account".
The chairman, sounding like a vicar at a funeral service, soon reverted to remorse mode, saying he'd sent letters to all the bank's employees thanking them for their "absolutely superb" efforts at a difficult time. But he was confident enough to conclude that "when things are tough you really see organisations perform. In the midst of this there are lots of opportunities out there. This could be differentiating, ultimately. Adversity sorts out who the long term winners are going to be".
In defiance of those who have called for his head, and/or that of his chief executive, McKillop showed no sign of standing aside. He said he would be announcing "in a few weeks" some new appointments to the board that were promised at the time of the year-end results announcement. There has been speculation that one of those would be a senior non-executive who would succeed McKillop or at least be groomed to replace him.
Goodwin also gave no indication that he was ready to step down. Last week marked his 10th year at the bank, eight as chief executive, which is a relatively long time by modern standards. Questions have been raised about the succession strategy and why, for instance, the bank has no chief operating officer or deputy chief executive. A clearly indignant McKillop refuted suggestions that succession was not on the bank's agenda. "The board gives a lot of attention to succession. There is a plan being developed and for 18 months we have been working on it," he said.
With the shares responding positively to the announcement, it was clear that RBS and the board had escaped what was in danger of being banking's Armageddon. The bank will make a profit for the full year and has already more than replaced the £5.9bn it has lost in toxic credit market writedowns which will not be repeated in the second half of the year.
With indications that there were no more monsters hiding in the cupboard, the City felt confident enough to offer at least two cheers and mark up the shares which closed the day up 7.5p at 240.50p. The shares are up 18.6% on the month, though they remain well below their year highs. They are down 48.2% since this time last year.
Goodwin admitted in his statement that he felt "chastened" by the whole experience of the credit crunch and being forced to reveal what turned out to be the second worst loss in banking history. It was not what he hoped to find on his CV and it was probably a factor in his resisting any pressure to go at this time, given that he would be leaving at the lowest point.
Chastened, maybe. But analysts say he will also avoid chasing other big targets for some time to come. Acquiring ABN Amro may prove to be the last big deal he does at RBS.
Highs and lows of 'Fred the Shred'1983Joins accountants Touche Ross, qualifies as a chartered accountant and becomes a partner five years later.
1990Becomes a partner and makes his mark handling the worldwide liquidation of Bank of Credit and Commerce International, eventually getting back half the money from one of the most complicated financial frauds ever.
1995He is headhunted for the job of deputy chief executive of Clydesdale Bank and becomes chief executive in 1996.
1998Joins RBS as deputy chief executive to Sir George Mathewson, whom he succeeds in 2001. He plays a key role in the acquisition of NatWest by RBS in 2000. It is rumoured that while at RBS he was mugged at one of his own cash machines after his chauffeur stopped so that he could get some cash. The assailant apparently snatched his bank card while Goodwin's chauffeur waited nearby.
2001Goodwin embarks on an aggressive acquisitions strategy, buying the Irish mortgage provider First Active and UK car insurer Churchill. A number of deals in the US bulked up its Citizens Financial subsidiary.
2002 He is named Forbes Businessman of the Year by the global edition, which describes him as an original thinker with a fast-forward frame of mind who had transformed RBS from a nonentity into a global name.
2003He is No 1 in Scotland on Sunday's Power 100 and is named European Banker of the Year.
2004Knighted in the Queen's Birthday Honours list. The acquisition of Charter One Financial for $10.5bn is criticised by analysts for coming at too high a price but it extends RBS's interests across the Midwest and elevates it to seventh biggest bank in the US.
2005RBS acquires a 5% stake in Bank of China but Goodwin is criticised by some shareholders for putting global expansion ahead of short-term financial returns. Goodwin is accused of megalomania and he promises not to indulge in any further big acquisitions.
October 2007Completes acquisition of ABN Amro with partners Santander and Fortis, the biggest banking takeover in history.
December 2007Forced to admit writedowns due to credit crisis.
February 2008RBS announces a record £10bn annual profit.
April 2008Goodwin and chairman Sir Tom McKillop, above, face resignation calls over balance sheet crisis. Record £12bn rights issue announced.
August 2008Announces record half-year loss of £692m.
The full article contains 1836 words and appears in Scotland On Sunday newspaper.
