Beleaguered Royal Bank of Scotland will be back in the black ‘within two years’

ROYAL Bank of Scotland is two years away from turning its years of losses into a profit, according to chief executive Stephen Hester.

In a robust defence of the bank’s performance, he urged the public to be patient and to recognise the progress that is being made to restore the balance sheet.

“We made £6.1 billion of profit, but we spent it cleaning up the bank,” he said in an interview with The Scotsman.

“There are things outside my control but it [profit] is not many years away – two years before we have a bottom line profit. I don’t think it will take three.”

RBS announced a fully attributable £2bn loss for 2011, or £766m at the pre-tax level, its fourth year of losses since it was bailed out by the UK government with a £45bn rescue package.

But the bonus issue dominated debate yesterday after RBS confirmed that it would pay a total of £785m to staff despite the continuing losses. Hester defended the bonuses as key to retaining and attracting staff.

“It takes a brave person to come to RBS with all the noise that surrounds us,” he admitted. But it was his job to “deliver a recovered RBS. I hope the outside world gives us some credit”.

Nic Clarke, banking analyst at Charles Stanley, said that RBS faced “continuing challenges in Ulster Bank and corporate real estate portfolios”.

More positively, he said UK retail, which includes NatWest, US retail and commercial and insurance divisions “all improved their performance markedly on 2011”.

However, he only recommended the stock as a “hold”, citing potential pressures to the business if the UK’s “very weak” economy deteriorated further.

He remained “worried about the potential for further damaging intrusion by politicians, who have shattered the idea that RBS is to be run on an arm’s length basis from the government”.

At last night’s RBS closing share price of 28.7p, the taxpayer is sitting on losses of nearly £19bn from its £45bn bailout of the bank in the financial crisis.

The UK retail banking business was again a “terrific” performer, Hester said, with profits up 45 per cent to within an ace of £2bn as bad debts fell nearly a third to £788m from £1.6bn in 2010.

The high street arm had benefited from cost efficiency measures and increasing automation, Hester said, adding that the bank was “now the market leader in processing transactions on smartphones”.

The insurance division, now renamed Direct Line ahead of its planned flotation by the end of 2012, bounced back into profit, with earnings of £454m compared to a £295m loss last time. Hester said this was due to writing less risky business, and closing some sites.

“Hopefully it has been set up for a good [stock market] reception later this year,” said Hester.

Corporate banking profit fell 3 per cent to £1.4bn as businesses remain cautious on the economic outlook and investment plans.

Hester defended RBS’s lending to British business. He said the bank handed out £93.5bn of new lending to UK businesses in 2011, up 22 per cent on the previous year, which included £40.9bn to SMEs, a 4 per cent increase.

This was almost as much lending to small businesses as all the Royal’s competitors combined, Hester said, adding: “I’m happy with that. That’s a very strong contribution to support small business in this country.”

Ulster Bank’s losses increased over a third to £1bn from £761m last time as bad debts across the Irish Sea rose to £1.38bn from £1.16bn in the previous year. The Citizens retail business in the US continued to benefit from a recovering US economy, with profits rising 57 per cent to £479m.