Osborne is expected to use his Mansion House speech to confirm plans to sell the government’s 39 per cent stake in Lloyds Banking Group, which at current prices could raise as much as £17 billion for the Treasury.
He is also expected to address heightened focus on the fate of RBS as speculation continues that he and Hester clashed over the pace of the bank’s recovery. It is thought Osborne will play down calls to break up RBS into a “good bank” and a “bad bank”.
UK Financial Investments (UKFI) is thought to have advised Osborne to avoid selling stakes in Lloyds and RBS too soon. But it is thought a quick sale of shares in Lloyds and RBS before the next general election in 2015 is seen by Osborne as a vote winner.
Although the Treasury insists there is no formal timetable for privatisation, it is thought Osborne is keen to see RBS returned to the private sector no later than the end of 2014. It is thought Osborne has been looking at disposing of a 10 per cent stake in Lloyds by the end of this year.
The Parliamentary Commission on Banking Standards, which will publish its report ahead of Osborne’s speech, has watered down its call to hive off £40bn in bad assets from RBS’s balance sheet.
In the last five years, Hester has already reduced the balance sheet by more than £900bn. But government pressure on the bank to boost its lending, particularly to small to medium-seized businesses is set to increase after lending by the bank fell by £4bn in the last 12 months.
Instead of a break-up, the committee is expected to advocate moves to hasten RBS’s departure from its global markets business and to sell Citizens, RBS’s US-based retail bank.
Finance director Bruce Van Saun last week detailed a further 2,000 job cuts to RBS’s investment banking arm. Van Saun, who is considered an internal candidate to succeed Hester, pledged to cut costs from around £3bn a year to £2bn. Hester has been resistant to pressure to reduce bank assets any further than necessary.
Rumours of heightened animosity between Hester and Osborne have been denied by both men. But a carefully worded statement given by economic secretary to the Treasury Sajid Javid last week did nothing to quell belief that the Chancellor was behind Hester’s departure.
He told MPs that “the Chancellor has not been directly involved in meeting with Hester,” adding: “He has not met with Hester prior to his departure on this issue.”
The City may remain difficult to convince that Osborne is a better judge on how to improve the bank’s performance and lending.
JP Morgan was reported to have said that Hester was “extremely well regarded by investors, who would likely have preferred for him to remain in office until the privatisation process was well advanced”.
Richard Curr, head of dealing at Prime Markets, added: “Investors and shareholders by and large greatly respected Stephen Hester, hired to extract the bank from the mire, and it will no doubt be a huge disappointment that what is largely viewed as government tinkering has led to his resignation.”