George Kerevan: RBS could be a sound investment

Would you buy a used bank from Stephen Hester, chief executive of RBS? According to the bank’s 2012 accounts, RBS either made a loss of £5.2 billion or a modest profit of £3.5bn. Which is it? Answer: neither.

In fact, a close reading of the accounts shows that Hester – at the behest of the Treasury – has battered and cajoled RBS into a lean, mean money machine, so it can be sold for a quick buck. Quite whether that has done anything for the real economy is another matter.

The bit of RBS that Mr Hester wants to keep (its “core” UK lending business) is turning a genuine profit. Indeed, it is making twice as much as it did in 2011. Expressing core profits as a percentage of annual gross revenue yields a very healthy return of nearly 14 per cent. Compare that to British Gas, which has just been given a media mauling for making a modest 7.9 per cent return on sales.

There are a couple of millstones hanging around Mr Hester’s neck. First, the so-called “impairment losses” that continue to accrue from the dodgy lending and acquisitions that the bank undertook during the mad boom days under (ex-Sir) Fred Goodwin. These ran to circa £5.3bn in 2012. Without these losses, RBS profit on revenues would be a staggering 43 per cent. The words “daylight” and “robbery” come to mind.

Mr Hester’s main job since taking the helm in 2008 has been to write off RBS loss-makers and downsize the bank radically, using the proceeds to pay down debt. He’s well on his way to achieving that goal through ruthless cost cutting, squeezing margins and selling the family silver. In other words, Mr Hester is more of a surgeon than an entrepreneur.

The other millstone weighing down RBS involves the delicately termed “legacy conduct items”, known to you and me as fines, indemnities and repayments arising from gross misconduct, fraud, chicanery and general malfeasance for which RBS or its former employees have been deemed responsible. Amazingly, these came to “only” £2.2bn this year – a snip.

In fact, RBS under Mr Hester made enough real cash in 2012 to cover both its historic bad debts (impairment losses) and its sin taxes (legacy conduct items). The true reason RBS ends up with a technical loss has to do with the UK’s strange and over-conservative official accounting rules.

These force banks to put more aside if the market value of their issued bond debt increases – a very theoretical increase in risk. Because investors are so comfortable with Mr Hester’s progress, they started trading in RBS bonds again, forcing the bank to put aside nearly £5bn in extra reserves.

Not that Mr Hester is too worried. This accounting wheeze makes RBS appear frugal when the bank is earning twice the return on revenues as naughty British Gas. And that £5bn is cash Mr Hester gets to keep rather than give to shareholders.

All of which explains the resurgence in talk of returning RBS to majority private ownership – it is about 81 per cent state owned following the bank’s £45bn rescue by the Treasury in 2008. There have also been suggestions – since discounted by Chancellor Osborne – of giving the government’s RBS shares to all of Britain’s 45 million adults, which would result in a personal stake in the bank worth between £300 and £400 at current prices.

However, we need to delve a little deeper into the RBS accounts before we rush to sell it off to the highest bidder, to make George Osborne look good. If you ignore derivatives (fancy bets that are offset by others on the liabilities side of the balance sheet), roughly 10 per cent of RBS assets are sitting doing nothing at the Bank of England – a cool £80bn. No wonder Paul Tucker, the deputy governor of the Bank of England, is talking about “negative interest rates”; ie charging commercial banks, such as RBS for keeping their cash idle.

There is also £157bn that RBS has put into buying UK and eurozone government bonds, another safe way of parking cash you aren’t lending to the real economy. RBS also has £64bn with other banks. In total, that’s a cool £300bn under the RBS bed compared with £107bn in loans to UK business or £114bn to UK consumers.

Other banks also salt away their assets but they are not owned by the state. Which must raise questions about how effective RBS is in helping the real economy.

The time has come to stop treating RBS as a government cash box motivated by short-term balance sheet considerations. It is time to experiment. But diffusing RBS shares among 45 million separate individuals will just mean the RBS board can do what they please. And selling RBS back to the City types who ruined it in the first place hardly helps the real economy.

We need to turn RBS into a genuine people’s bank. It should stay publicly owned, with the remaining private shareholding converted to bonds. RBS could then take a long view of lending. Instead of letting cash sit idle in the Bank of England, RBS could use the money to develop business funding projects and collecting rent on them. Another option is to break RBS into regional public banks so we would see a Royal Bank of Scotland once again, with profits retained for local investment.

I don’t want any bank run directly by politicians – that’s a recipe for commercial ruin. But there will always be state intervention in the financial system because we can never let major banks fail. That leaves only two possibilities. Either we set rules that end up making banks ultra conservative and cash-conscious, as we’ve done in Britain.

Or we keep at least one of our big banks publicly owned and with a charter to make profits over the long term. That mix will maintain competition in the marketplace yet block any return to the casino banking of five years ago.