• Stephen Hester says the privatisation is getting closer
• £607m paid out in bonuses, £215m to investment bankers
• £450m extra charge from PPI scandal
• Plans to spin off part of US arm Citizens
Royal Bank of Scotland declared on Thursday it was on track for a partial privatisation next year but sparked a fresh row over bonuses at the scandal-hit institution.
The bank posted an annual loss of more than £5bn and Stephen Hester, its chief executive, admitted 2012 had been a “chastening” year after its £390m Libor rigging fine. Its total losses since the 2008 bailout have now topped £34bn. However, the bank is still paying out £607m in bonuses in the coming weeks.
The shares were among the biggest fallers on the stock market, losing more than 6% to 323p – which amounts to a near £15bn loss on the taxpayer’s 82% stake.
Hester, however, said “the light at the end of the tunnel” toward privatisation was “coming much closer” while Sir Philip Hampton, RBS’s chairman, hoped the bank would start to pay a “token” dividendto shareholders – the first since the banking crisis – “as soon as possible”. He said: “Our objective is to give the government options to sell its stake as soon as possible and it would be very good if we could make that ‘as soon as possible’ 2014.”
A government spokesman insisted that “there is no timetable for a disposal” although ideas for a free distribution of shares to 46m voters had been floated as recently as a fortnight ago.
George Osborne claimed credit for the decision by RBS to “accelerate” its focus on UK retail and corporate banking. It announced further streamlining of the investment bank and a plan to spin off part of its US operation, known as Citizens, in two years. Hester described UK Financial Investments, which looks after the stakes in the bailed-out banks, as becoming “more activist in trying to present its views”.
Asked what form any share sale would take, Hampton said he expected taxpayers to be able to “participate in the availability of shares” although he warned about the number of football stadiums that would be needed for shareholder meetings.
Hester said the privatisation of RBS would be a “seminal” moment, appearing to indicate that he intended to stay on to see the task through.
Despite the loss, RBS has paid out £607m in bonuses, £215m of which went to its investment bankers whose division was behind the Libor scandal. The bank, which said bonuses would have been £500m higher without the Libor fine, risked inflaming the row over City pay further by indicating that its annual report in March could disclose how many of its staff take home more than £1m.
Labour Treasury spokesman Chris Leslie said: “We need radical change in the culture of our banks and that must include reining in bloated bonuses, which are a device for keeping traders focused on the weeks ahead, rather than years ahead.”
Ian Gordon, analyst at Investec, said that RBS was “starting 2013 in a weaker financial position than the market had anticipated”. The bank insisted it would meet international targets for capital before the deadline in 2019.
Hester stressed that the bank’s assets had been reduced by £906bn since their peak in 2008 but acknowledged the cost of the payment protection insurance scandal, for which the bank took a further £450m charge to take the total cost to £2.2bn, and the interest rate swap mis-selling scandal had required a further £650m charge. The computer meltdown in June cost £175m.
He said: “2012 saw landmark achievements for RBS. It was also a chastening year. Along with the rest of the banking industry we faced significant reputational challenges as we worked with regulators to put right past mistakes.”
Osborne, who this week rejected calls for RBS to be fully nationalised, said: “I have been very clear that I want to see RBS as a British-based bank, focused on serving British businesses and consumers, with a smaller international investment bank to support that activity rather than to rival it.”
The chancellor added: “The government’s strategy is for RBS be a stronger and safer bank, which in time can be returned to full private ownership.” But he did not give any clues as to his preferred route for when a share sell-off can begin.
Hester acknowledged the influence of the government and also the regulators which have been conducting a review of bank capital. There had been an “important accommodation” over the bank’s capital, Hester said.
“The two revisions to our strategy that go with that are a further shrinkage of our markets business, with the capital there coming down significantly further over the next couple of years” and the intention to start selling Citizens.
On bonuses, Hester said that while the figure looked a “big number”, it was below the £1.8bn being paid out at Barclays and sums handed out by rivals UBS and Deutsche Bank.
RBS was forced to sell off its insurance business Direct Line by Brussels in return for the taxpayer bailout in 2008 and spun off a third of the operation last year, for which it has already been forced to take a goodwill writedown of £394m.
• This story was amended on Thursday 28 February to correct the figures for the amount being paid in bonuses
Stephen Hester’s £6m bonuses, on top of £1.1m salary, not all paid as MPs told of ‘reprehensible’ failings over Libor scandal
The chairman of the Royal Bank of Scotland on Monday described the pay of the bailed out bank’s chief executive Stephen Hester as “modest”, amid fresh scrutiny of bonuses in the wake of the £390m Libor fine.
Sir Philip Hampton said Hester – who can get up to £6m a year from bonuses on top of his £1.1m salary – was paid “well below the market rate of people working in banking” because his bonuses had not paid out in full. He was speaking during a lengthy session of the banking standards commission in Westminster, in which a senior RBS colleague admitted the bank had believed Libor rigging was “a mathematical impossibility”.
The evidence was called after RBS was fined £390m last week for rigging Libor, the interbank lending rate, and announced the departure of the head of its investment bank, John Hourican. Hourican told the commission that he was leaving in order to shoulder “ultimate responsibility” for the manipulation of the benchmark rate.
Hourican explained the bank had not been focused on Libor in 2008, at the height of the credit crunch, because “when we took control of the bank it had had a cardiac arrest”.
He added: “We had to prioritise dealing with the existential threat to the bank.” He urged those who are staying to change the culture, saying: “I have told people who are prepared to listen that they shouldn’t waste my death.”
Hampton, defending bonuses for Hester, conceded the chief executive had a “highly paid job” but that “his pay has been modest relatively”. He had received just one bonus since joining in 2008, of £2m, which has yet to be paid out. Some £780,000 of that will pay out in shares next month. Hester defended his pay, saying the nation was now “off the hook” for a lot of “bad things” of the past.
“My bonus should be assessed on all the things I do well and badly and judgment should be reached in the round,” said Hester. Hampton described Hester as having one of the most difficult and demanding jobs in banking. “He has also in his four years been paid well below the market rate for a job in world banking,” said Hampton.
Evidence was also taken from Johnny Cameron, the former head of RBS’s investment bank, who left after the bailout and has agreed with the Financial Services Authority not to hold a senior banking job again.
Andrew Tyrie, the conservative MP who chairs the commission, described Hourican “as a human shield” for others including his deputy, Peter Nielsen. Hourican said the bank was better served by Hester and Nielsen remaining in their roles.
Nielsen admitted that there were problems with the Japanese yen and Swiss franc Libor rates but that leading currencies such as sterling were not affected. “Senior management felt it was almost a mathematical impossibility” to affect Libor, Nielsen said.
He conceded that the bank had been too slow to respond to concerns about Libor and said the first two years after the bailout had been spent trying to save the bank. The Libor rigging took place between June 2006 and March 2010. Hourican admitted that it was “reprehensible” that Libor rigging had continued after the £45bn taxpayer bailout.
Tyrie expressed doubt about the bank’s claim that it would recoup £300m of the fine from bonuses.
“We were not given sufficient confidence today that the arrangement for funding the fines from bonuses will do what it says on the tin,” said Tyrie. The commission’s chair wants RBS to show what bonuses would have been paid without the fine.
How the benchmark rate fixing unfolded
The Libor interest-rate scandal dates back to 2005. Little known outside the City, it underpinned trillions of pounds worth of loans, mortgages and financial contracts in Europe and the US.
Regulators have already imposed £1.7bn of fines on a string of the world’s biggest banks, while police are pursuing criminal investigations into staff involved in rigging the rates to suit their employers.
Between January 2005 and June 2009, Barclays derivatives traders made a total of 257 requests to fix Libor and Euribor rates. Initially, traders sought to inflate the bank lending rate to boost profits – and their own bonuses.
After Northern Rock collapses, Barclays submits artificially low rates to give a healthier picture of its ability to raise funds.
In a phone call in December, a Barclays employee tells the New York Fed that the Libor rate was being fixed at a level that was unrealistically low.
In April the New York Fed queries a Barclays employee over Libor reporting.
The Wall Street Journal publishes the first article questioning the integrity of Libor.
Following the WSJ report, Barclays is contacted by the British Bankers’ Association over concerns about the accuracy of its Libor submissions.
Later in the year, the Fed meets to begin inquiry. Fed boss Tim Geithner gives Bank of England governor Sir Mervyn King a note listing proposals to tackle Libor problems.
A year on, the BBA issues guidelines for setting Libor rates.
In June, Barclays makes first effort to clamp down on Libor manipulation in email setting out standards of behaviour.
Royal Bank of Scotland sacks four people for their alleged roles in the emerging Libor-fixing scandal.
22 June Barclays chief executive Bob Diamond learns of emails sent by dodgy traders. He later says reading them made him feel “physically ill”.
27 June Barclays admits misconduct. Regulators fine it £360m.
29 June Diamond insists he will not resign.
July Barclays chairman Marcus Agius and Diamond resign, followed by chief operating officer Jerry del Missier.
The prime minister, David Cameron, announces a review of the banking sector, sets up Banking Commission. Serious Fraud Office (SFO) launches a criminal inquiry into Libor manipulation.
Deutsche Bank confirms that a “limited number” of staff were involved in the Libor rate-rigging scandal. It clears senior management. SFO arrests three men in connection with investigations into Libor.
Swiss bank UBS is fined £940m by US, UK and Swiss regulators.
January Barclays’ new boss, Antony Jenkins, tells staff to sign up to a new code of conduct – or leave the firm – in clean-up operation.
February RBS is fined £390m by