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Category : Business

Hester bemoans reputation of industry as RBS announces first-half losses of £1.5bn and £125m cost of IT failure

Stephen Hester, the chief executive of Royal Bank of Scotland, has admitted the reputation of the banking industry is at a new low, as the bailed-out bank was hit by a string of charges caused by computer mistakes and mis-selling financial products – with more to come from the Libor scandal.

First-half losses widened to £1.5bn from £794m the same time last year, amid fresh speculation that a full-scale nationalisation of the 83% taxpayer-owned bank is on the agenda. The bank’s senior independent director, former Standard Life boss Sir Sandy Crombie, is conducting a review of the “culture and values” of the bank in the light of the fresh scandals gripping the industry.

Results were hit by the enforced payout of £125m to compensate customers who fell victim to a computer meltdown in June – a cost that could yet rise – and which Hester described as a “significant blot” on the bank’s reputation.

Another hit from payment protection insurance took its total charge for the industry-wide selling debacle to £1.3bn while RBS is also setting aside £50m to compensate small business customers mis-sold interest rate swaps.

RBS has sacked four individuals involved in the manipulation of Libor, which has forced Barclays boss Bob Diamond out of his job and left the bank with a £290m fine.

“The Libor situation is on our agenda and is a stark reminder of the damage that individual wrongdoing and inadequate systems and controls can have in terms of financial and reputational impact. This is the subject of ongoing regulatory investigation but our customers and shareholders should be in no doubt that we are taking it seriously,” Hester said.

Admitting that the reputation of the industry was at “new lows”, Hester added: “This is dangerous because customer trust is a pre-requisite for a successful banking sector and an effective banking sector is so important to economic stability and growth. It especially saddens me because since rejoining the sector three-and-a-half years ago to lead the change and recovery at RBS, I have been struck by the sterling efforts of the vast majority of people in our bank to provide honest, reliable and helpful services to customers”.

“We are in a chastening period for the banking industry. The consequences of the sector’s past over-expansion are still being accounted for, probably with some way still to go,” he said.

The shares were the biggest gainers in the FTSE 100 in early trading, up 5% to 215p – but still causing a loss for taxpayers of more than £25bn. He warned that the bank could face further problems as it turned over “rocks”.

Brought in to run the bank when it was bailed out in October 2008, Hester insisted the bank could exit the asset protection scheme (APS) – which insures £300bn of its most toxic assets – in the second half of the year after paying out in £2.5bn. Even with the ongoing eurozone crisis, the bank has not been able to find a scenario that would require it to call upon the scheme.

Exiting the APS will be seen as a sign that Hester is trying to extricate the bank from government control, rather than prepare for full nationalisation. He insisted he knew of no government discussions that could lead to a full nationalisation of the bank and said he did not think it would be a way to lend the bank more – unless the government wanted to relax lending criteria.

“RBS is trying to lend as much as it prudently can,” said Hester. Applicants for loans from small businesses were down 18% on the first half of last year, while net lending was down 2%.

Some 5,700 jobs have been cut compared with the same period last year. The bank will float its Direct Line insurance arm in October 2012, a disposal demanded by Brussels in return for £45bn of taxpayer funds. It completed in three tranches until 2014.

Another EU-mandated sale – the sell off of branches to Santander – is falling behind track and being extended “well into 2013″.

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