Stephen Hester must be hoping 2013 will not be another annus horribilis for RBS
After UBS’s £1bn fine for fixing Libor all eyes are now on RBS, which is expected to face the next crackdown. James Quinn reports
The year 2012 was one that Stephen Hester would perhaps rather forget. For the
chief executive of Royal
Bank of Scotland, it began with a political furore over his £1m
bonus, which he eventually gave up rather than be the subject of a House of
Commons vote.
The bank was then hit by a major technical fiasco in late June which saw
millions of customers unable to access their accounts for almost a week.
Then came the cancellation of its sale of 316 branches to Santander.
To add insult to injury, Hester was also personally upbraided by the Rt Rev
Justin Welby, the incoming Archbishop of Canterbury, for failing to
explain the lender’s “duty to society”.
In what has been a damaging week for the already down-at-heel banking sector,
further headaches emanated from the Parliamentary Commission on Banking
Standards which called for the pending ring-fence between retail and
investment banks to be “electrified”.
And Hester must have grimaced when he saw damaging emails emanating from UBS’s
landmark £940m Libor fine from global financial regulators in
which one trader promised in return for a fix: “I’ll pay you, you know,
$50,000, $100.000... whatever you want... I’m a man of my word.”
As the year ends with the prospect of a multi-million dollar fine over RBS’s
role in the Libor-fixing scandal, Hester must hope such damaging revelations
are not in store for his bank when it comes time to settle with the
Financial Services Authority (FSA) and others.
But if 2012 has been Hester’s own annus horribilis, there are few signs that 2013 will be any better.
Although it ends the year relatively strong in share price terms – closing at 315.2p on Friday, having hit a year high of 317.7p on Thursday – there are a number of headwinds which the bank faces in the new year over which Hester has little control. As a result, senior sources within the bank admit that 2013 could be just as tough as the year that is coming to an end, with one candidly admitting that RBS is “running hard to stand still”. If that is the case, what does it mean for Hester, and his determination to not only turn the bank’s finances around, but also to put it in a position where at least part of the Government’s 82pc stake can be sold? Could 2013 be the year that Hester finally puts the state-owned bank’s troubles behind him? Or will it be the year that Hester finally calls it a day?
First on the agenda for 2013 – expected as soon as the first two weeks of January – is RBS’s settlement for its part in the Libor-fixing scandal. Sources within the City regulator say that the Scottish bank is now back at the top of the FSA’s agenda following the UBS fine. Although the team working on the RBS case is different from the one which compiled the UBS case, senior figures within the watchdog have apparently been distracted by attempting to co-ordinate timing with rival regulators. This has added to the delay in finalising the fine.
The size of the global fine is not known. It is understood it will be somewhere between the £290m paid by Barclays and the amount paid by UBS. Hester has publicly said he would be “disappointed” if it were not settled by the year-end results, traditionally published at the end of February. “It is completely out of our hands,” said one RBS source. “We thought UBS was going to be months ago,” said another regulatory source with reference to last week’s settlement.
Regulatory sources say there remains a possibility, as highlighted by The Sunday Telegraph in November, that the FSA might attempt to bring its own settlement ahead of that of the US Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC). The source stressed, though, that a global settlement remains the most likely option.
Indeed, one blue-chip shareholder said that he thought although the Libor settlement will not paint RBS in a positive light, it is historic and the handful of people involved in it are no longer at the bank. Libor is not the only settlement which could cause problems for Hester. The other main regulatory issue likely to affect the bank’s copy book next year is the issue of the mis-selling of interest rate derivatives, known as swaps, to small and medium-sized companies. Hester will have been pleased to see that one of the first swaps cases to come to court ended on Friday in the bank’s favour.
The case – Green and Rowley vs RBS – saw the claim against the bank dismissed, with RBS awarded costs against the catering business from Lytham St Annes, Lancashire. To date, RBS has taken £50m of provisions relating to swaps mis-selling, compared to Barclays which has accounted for £450m.
However, industry experts question whether, in spite of Friday’s judgment, that will be enough to cover other settlements likely in the new year.
As all the major banks have done, RBS has completed a pilot study of 50 claims which it has assessed, under the watchful eye of an independent auditor. That study is now with the FSA, which will try to spot inconsistencies in the way in which claims have been handled by different banks and whether there are issues that need to be ironed out.
Hester is understood to have taken personal interest in a number of the cases. The bank is thought to believe that it is not possible to have a “one size fits all” solution for customers, given the complex nature of the products and the different types of businesses involved.
It is thought possible that further provisions may be made in the full year results, due in late February, although the quantum is not known. One top 15 shareholder said this weekend it was “nigh impossible” RBS would not need to take more provisions over swaps, given the apparent size of the problem.
The third sin of the past to be dealt with in 2013 is the investigation by US authorities into money laundering. The details around the probe – being led by the US Federal Reserve and state banking regulators – have not been disclosed. However, it is understood that the issue is not being prioritised by regulators and a settlement is not expected until much later in 2013.
It is not just financial penalties which will tax Hester come January. One of the more high-profile decisions, if financially less important, is the future of the 316 branches which Santander pulled out of buying in October. The Spanish bank had agreed to buy them for £1.65bn when the deal was signed in 2010, but with a current book value of £1.3bn, it is likely the units will now only sell for around 0.5 times book, equivalent to £650m.
Hester is believed to be less troubled by the branch sale conundrum than some of his other problems, given he has managed to reduce the balance sheet by £750bn in four years. The branch business has a balance sheet of £20bn, in part due to the small and medium-sized company loans it has on its balance sheet. Suitors include JC Flowers and Virgin Money.
The price is less important to RBS than the sale itself, mandated by the European Commission under state aid rules linked to the £45bn of government funding used to prop up the bank at the height of the financial crisis.
It is now expected within RBS that a new transaction will not close until the second half of 2014. That means RBS will need to request extra time to sell the assets, given the original December 2013 deadline set by the EC.
The other key disposal being discussed by analysts and investors alike is Citizens, the regional US bank which is one of RBS’s star divisional performers. Hester is believed to be reluctant to sell Citizens unless he either needs to do so for capital reasons or unless, once improvements have been made, it receives an offer which provides a high premium. As the old saying goes, everything is for sale at the right price.
However, he may not get to wait that long, given the constant discussion among regulators about the need for extra capital in the UK banking system. It is thought that if the Financial Policy Committee of the Bank of England indicates the need for extra capital within RBS, Citizens will be put on the block, even though it will not benefit shareholders in the long term.
Citizens is not the only option, should further capital be needed. Ian Gordon, banking analyst at Investec, suggests reducing part of the bank’s US investment banking arm in order to free up the necessary capital. “I think that would make a lot more sense,” he says. “If RBS is forced to push Citizens out the door, it would be sub-optimal.” He points to the downward pressure on compensation in investment banking as benefiting Hester, as well as the need to take out “a few more hundreds, possibly low thousands” of jobs across its retail and commercial franchises next year in order to reduce costs.
One way in which RBS is expected to right some of the wrongs of the past is by encouraging the bank’s focus to think “of the outside” – in terms of customers and society – in everything it does.
As The Sunday Telegraph reveals today, Hester is embarking on a new project to encourage the bank’s 150,000 employees to think more broadly about the bank’s purpose. A new corporate slogan is in the works. The “think outside” mantra is deemed by senior RBS management to be just as, if not more, important than the revision of its codes of conduct. One source suggested it needed to be “like a religion” to serve customers and others first.
So what does all this mean for RBS and, perhaps as importantly, for the man who has led it for the past four years? John-Paul Crutchley, UBS’s banking analyst, believes “there is no European bank that has done as much and been rewarded as little as RBS for the efforts of
its restructuring”.
He refers to 2013 as “the last year of significant restructuring for RBS” however, and says Hester has defined a business model capable of delivering acceptable returns to shareholders in the future.
“I would be surprised if he [Hester] jumped ship in 2013,” says Gordon. “He’s doing a good job in difficult circumstances. It would be unfortunate if he were to [decide] he didn’t want to carry on.”
But if 2012 has been Hester’s own annus horribilis, there are few signs that 2013 will be any better.
Although it ends the year relatively strong in share price terms – closing at 315.2p on Friday, having hit a year high of 317.7p on Thursday – there are a number of headwinds which the bank faces in the new year over which Hester has little control. As a result, senior sources within the bank admit that 2013 could be just as tough as the year that is coming to an end, with one candidly admitting that RBS is “running hard to stand still”. If that is the case, what does it mean for Hester, and his determination to not only turn the bank’s finances around, but also to put it in a position where at least part of the Government’s 82pc stake can be sold? Could 2013 be the year that Hester finally puts the state-owned bank’s troubles behind him? Or will it be the year that Hester finally calls it a day?
First on the agenda for 2013 – expected as soon as the first two weeks of January – is RBS’s settlement for its part in the Libor-fixing scandal. Sources within the City regulator say that the Scottish bank is now back at the top of the FSA’s agenda following the UBS fine. Although the team working on the RBS case is different from the one which compiled the UBS case, senior figures within the watchdog have apparently been distracted by attempting to co-ordinate timing with rival regulators. This has added to the delay in finalising the fine.
The size of the global fine is not known. It is understood it will be somewhere between the £290m paid by Barclays and the amount paid by UBS. Hester has publicly said he would be “disappointed” if it were not settled by the year-end results, traditionally published at the end of February. “It is completely out of our hands,” said one RBS source. “We thought UBS was going to be months ago,” said another regulatory source with reference to last week’s settlement.
Regulatory sources say there remains a possibility, as highlighted by The Sunday Telegraph in November, that the FSA might attempt to bring its own settlement ahead of that of the US Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC). The source stressed, though, that a global settlement remains the most likely option.
Indeed, one blue-chip shareholder said that he thought although the Libor settlement will not paint RBS in a positive light, it is historic and the handful of people involved in it are no longer at the bank. Libor is not the only settlement which could cause problems for Hester. The other main regulatory issue likely to affect the bank’s copy book next year is the issue of the mis-selling of interest rate derivatives, known as swaps, to small and medium-sized companies. Hester will have been pleased to see that one of the first swaps cases to come to court ended on Friday in the bank’s favour.
The case – Green and Rowley vs RBS – saw the claim against the bank dismissed, with RBS awarded costs against the catering business from Lytham St Annes, Lancashire. To date, RBS has taken £50m of provisions relating to swaps mis-selling, compared to Barclays which has accounted for £450m.
However, industry experts question whether, in spite of Friday’s judgment, that will be enough to cover other settlements likely in the new year.
As all the major banks have done, RBS has completed a pilot study of 50 claims which it has assessed, under the watchful eye of an independent auditor. That study is now with the FSA, which will try to spot inconsistencies in the way in which claims have been handled by different banks and whether there are issues that need to be ironed out.
Hester is understood to have taken personal interest in a number of the cases. The bank is thought to believe that it is not possible to have a “one size fits all” solution for customers, given the complex nature of the products and the different types of businesses involved.
It is thought possible that further provisions may be made in the full year results, due in late February, although the quantum is not known. One top 15 shareholder said this weekend it was “nigh impossible” RBS would not need to take more provisions over swaps, given the apparent size of the problem.
The third sin of the past to be dealt with in 2013 is the investigation by US authorities into money laundering. The details around the probe – being led by the US Federal Reserve and state banking regulators – have not been disclosed. However, it is understood that the issue is not being prioritised by regulators and a settlement is not expected until much later in 2013.
It is not just financial penalties which will tax Hester come January. One of the more high-profile decisions, if financially less important, is the future of the 316 branches which Santander pulled out of buying in October. The Spanish bank had agreed to buy them for £1.65bn when the deal was signed in 2010, but with a current book value of £1.3bn, it is likely the units will now only sell for around 0.5 times book, equivalent to £650m.
Hester is believed to be less troubled by the branch sale conundrum than some of his other problems, given he has managed to reduce the balance sheet by £750bn in four years. The branch business has a balance sheet of £20bn, in part due to the small and medium-sized company loans it has on its balance sheet. Suitors include JC Flowers and Virgin Money.
The price is less important to RBS than the sale itself, mandated by the European Commission under state aid rules linked to the £45bn of government funding used to prop up the bank at the height of the financial crisis.
It is now expected within RBS that a new transaction will not close until the second half of 2014. That means RBS will need to request extra time to sell the assets, given the original December 2013 deadline set by the EC.
The other key disposal being discussed by analysts and investors alike is Citizens, the regional US bank which is one of RBS’s star divisional performers. Hester is believed to be reluctant to sell Citizens unless he either needs to do so for capital reasons or unless, once improvements have been made, it receives an offer which provides a high premium. As the old saying goes, everything is for sale at the right price.
However, he may not get to wait that long, given the constant discussion among regulators about the need for extra capital in the UK banking system. It is thought that if the Financial Policy Committee of the Bank of England indicates the need for extra capital within RBS, Citizens will be put on the block, even though it will not benefit shareholders in the long term.
Citizens is not the only option, should further capital be needed. Ian Gordon, banking analyst at Investec, suggests reducing part of the bank’s US investment banking arm in order to free up the necessary capital. “I think that would make a lot more sense,” he says. “If RBS is forced to push Citizens out the door, it would be sub-optimal.” He points to the downward pressure on compensation in investment banking as benefiting Hester, as well as the need to take out “a few more hundreds, possibly low thousands” of jobs across its retail and commercial franchises next year in order to reduce costs.
One way in which RBS is expected to right some of the wrongs of the past is by encouraging the bank’s focus to think “of the outside” – in terms of customers and society – in everything it does.
As The Sunday Telegraph reveals today, Hester is embarking on a new project to encourage the bank’s 150,000 employees to think more broadly about the bank’s purpose. A new corporate slogan is in the works. The “think outside” mantra is deemed by senior RBS management to be just as, if not more, important than the revision of its codes of conduct. One source suggested it needed to be “like a religion” to serve customers and others first.
So what does all this mean for RBS and, perhaps as importantly, for the man who has led it for the past four years? John-Paul Crutchley, UBS’s banking analyst, believes “there is no European bank that has done as much and been rewarded as little as RBS for the efforts of
its restructuring”.
He refers to 2013 as “the last year of significant restructuring for RBS” however, and says Hester has defined a business model capable of delivering acceptable returns to shareholders in the future.
“I would be surprised if he [Hester] jumped ship in 2013,” says Gordon. “He’s doing a good job in difficult circumstances. It would be unfortunate if he were to [decide] he didn’t want to carry on.”
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