Breakfast briefing with RBS CEO Stephen Hester

One of our directors, Chris Wilson, attended a breakfast briefing this morning and was given a personal insight into the most challenging job in banking as RBS Chief Executive, Stephen Hester, addressed an ICAS business breakfast in Bishopgate, London.

Some of the key / interesting things that Stephen was saying:

1. When he took over, the business was tactical and opportunistic without any long term strategy as to what it was and where it was going.

2. The turnaround is the biggest corporate turnaround in history – the £45 billion provided by the government didn’t fix the problem it allowed the bank the necessary time to start the programme of fixing itself. The 5 year turnaround plan involves the £45 billion, together with c.£6 billion a year of profits from the core business, to fund the closure and exit of loss making positions

3. There was no rocket science involved in coming up with the plan – back to simple basics of good business practice. The problems identified from inside the bank were the same as those that were evident from the outside

4. The entire executive board changed in the first six months. The culture was that the bank was run by a small team of senior executives – Hester has changed this by creating value principles and then delegating the authority down the chain to run the business within those principles

5. The bank followed a process of good bank / bad bank – splitting what was the core focus going forward from the rest. In a turnaround, you have to be sure that the core business you are trying to save has value otherwise there is no point continuing

6. Each business unit had to justify its existence – there was a 5 point test that it had to pass otherwise the bank looked to exit. This included market share, competitive advantage and return on capital

7. The bank is 18 months away from completing its balance sheet clean up. To date, the bank has shrunk its balance sheet by £800 billion. The biggest challenge remains the bank’s exposure to Irish property which will take a generation to work through

8. Cost of capital for the banks is increasing and therefore this will flow through to customers – regulation to reduce bank risk (capital ratios, splitting investment and other banking operations) will drive up cost of funds and this will drive margins on loans. The bank could do more to articulate this to customers

9. RBS now matches every loan with a deposit whereas in 2008 its loan to deposits was 1.5x

10. In 2008 the bank’s business lending was 50% property related. They are moving this to 15% – 20% and therefore property lending is very challenging to get finance for
11. 40p in every £1 spent in the UK passes through RBS – it still has the largest market share of any UK bank and has not lost a single percentage point of market share since the crisis

12. Lending to UK trading business is not constrained by capital – exiting non-core and reducing capital allocated to property has meant that the bank has increased the available capital to lend to UK businesses. It can’t meet its lending targets because of insufficient demand for lending due to risk aversion in uncertain economic times

13. RBS approves c.85% of all lending requests submitted

14. Need to avoid ‘pie chart management’ – i.e. coming up with a Utopian view of what you want your business to look like and then back filling your actions. Start with the realities of what your competitive advantage is and what your customers want and deliver a strategy based on that

15. Banking is a mature, capital intensive industry without patent protection and as such returns should be in line with GDP. Leverage disguised this fact for many years but a return to low growth and unspectacular returns is where the bank is heading

Overall impression was that the bank is now well on track to becoming a more sustainable and de-risked proposition. Hester is unconvinced on some of the regulation thinking that it will increase risk and cost unnecessarily (i.e. splitting investment banking operations). RBS will be a much more responsible business seeking to make a difference in the markets and customers it serves going forward.