Instead, let us concentrate on whether Stephen Hester is getting anywhere with his five-year plan to return Royal Bank of Scotland to sustainable profits and shareholder value.
The first half of year three shows progress – I’d give it beta plus. Particularly impressive is the de-risking and removal of non-core (ie, loss-making or distracting) assets. These are down £22 billion to £72bn. Short-term wholesale borrowings are down £40bn to £62bn, against a comfortable liquidity buffer of £156bn. Deposits are up £7bn, giving a safe loan-deposit ratio close to 100 per cent.
However, is safety the best test of Hester’s management? Now the immediate crisis is over, when is the focus going to be on making profits?
Forget the headline loss of £1.5bn, that is mostly to do with the UK’s over-conservative accounting rules, which force banks to put more aside if the market value of their issued debt increases.
But this only happens when banks perform better, enticing investors to buy such debt on the secondary market. RBS made a technical loss precisely because investors were so comfortable with its progress that they started trading in its debts.
The true number to worry about is the operating profit in the core business – the bits that Hester wants to focus on in the future. For the first half, RBS made a core operating profit of £3.2bn. But that’s £1.2bn down on the first half of last year despite fewer bad loans.
This may reflect the recession and a reduction in income. For instance, the volume of small business loan applications to RBS was down a hefty 18 per cent on the first half of 2011. But it may also suggest that management is focused on restructuring rather than returns. Note that the core cost-income ratio actually worsened to 61 per cent, against 57 per cent in 2011, implying a loss of efficiency.
Three years into the restructuring programme, we might also ask if some of Hester’s divestments no longer make strategic sense.
For instance, the first half saw the largest single disposal by RBS since it was rescued by the Treasury in 2008. This was the sale of its aircraft leasing division – one of the world’s biggest – to Japan’s Sumitomo Mitsui Financial Group for £5bn.
In 2008 the priority for RBS was to de-risk and shrink balance sheets. But the need for new, fuel-efficient jets has made the aviation leasing business immune to the winds of global recession. So why sell a winner just to downsize RBS for the sake of it?
Draghi poker-faced to deal with Bundesbank
DOES Mario Draghi, the head of the European Central Bank (ECB) since November, play poker? Possibly.
Last week, Draghi surprised the world by announcing he would do “whatever it takes” to preserve the euro. Investors took this to mean the ECB would restart its programme of buying sovereign eurobonds, putting a floor on their price. Euphoria ensued. Yields on Spanish and Italian bonds dropped and stocks rose.
But on Thursday, when the German-dominated ECB met for its monthly policy confab, Draghi came away with no concrete action.
All week the Bundesbank had been growling at Draghi, opposing fresh ECB intervention and stressing the danger of inflation – a danger invisible everyone except the German central bank.
Clearly, the Bundesbank felt it had a stronger hand than Draghi. But Draghi was not ready to fold. After Thursday’s ECB meeting, he made yet another pronouncement.
First he saw the Bundesbank bet by stressing the need to deal with the moral hazard problem of supporting profligate eurozone members. Any ECB intervention would only be in the secondary market, and only after governments meet budget conditions set by the EU and IMF.
Next, he upped the ante by proposing the ECB “may undertake outright open market operations of a size adequate”, meaning the ECB would print euros to buy bonds.
In other words, he is calling the Bundesbank’s bluff. If the Germans dare to veto intervention, the markets will go into meltdown. Watch out for the next play at the ECB’s September meeting.