Boss' Bonus: incredible!
HEARD ON THE STREET: RBS Banks Hester Bonus
Last update: 2/25/2010 7:48:16 AM
By Simon Nixon
A DOW JONES COLUMN
Stephen Hester is entitled to feel hard done by. If any European bank chief deserved a bonus this year, it was the Royal Bank of Scotland boss. Unlike Eric Daniels - to whom the Lloyds Banking Group board was inexplicably planning to hand a GBP2.6 million bonus until Daniels was shamed into rejecting it - Hester was not the author of his bank's misfortunes. He was brought in to revive the 84% state-controlled bank after taxpayers were forced to pump in GBP45 billion to rescue it - and judging by RBS's lower-than-expected GBP3.6 billion loss in 2009, he is succeeding. Bowing to political pressure by refusing his bonus was a worthy act of self-sacrifice.
True, RBS's performance, in common with other universal banks, was largely driven by its investment banking unit, buoyed by massive monetary and fiscal stimulus. But the division's GBP5.7 billion operating profit - nearly double 2007 levels - was achieved despite the negative publicity and a restructuring that halved the size of its balance sheet, suggesting Hester has limited the damage to the franchise. That will raise hopes that revenues of around GBP2 billion in each of the last two quarters are sustainable.
Hester was also lucky the global economy picked up and unemployment has so far turned out lower than expected. That helped keep a lid on impairments which, while still huge at GBP1.9 billion in the fourth quarter alone, appear to have peaked in the third quarter. Combined with a slight increase in net interest margins to 1.83% thanks to higher prices for loans, RBS's retail and commercial bank units in the U.K. and U.S. were able to beat market expectations. Of course, the retail banks remain vulnerable to a double dip recession, but for the moment, Hester believes the worst may be over.
Either way, Hester looks to have succeeded in his first objective: to stabilize RBS. The bank now has a core Tier 1 capital ratio of 11% and a loan to deposit ratio of 135%, down from 154%. With 70% of the planned balance sheet reduction now achieved, it's no longer fanciful to look through the bank's current difficulties to Hester's "core RBS", which generated operating profits of GBP8.3 billion and a return on equity of 13%. Ironically, the improved outlook means RBS may now be more inclined to hold on to non-core assets for longer. But to the extent this minimizes ultimate losses, it should prove an added bonus - for shareholders and taxpayers, if not for Hester.
(Simon Nixon is European editor of Heard on the Street. He can be contacted on +44 207 842 9206 and Simon.Nixon@wsj.com)
