Royal Bank of Scotland Group Plc, Britain’s biggest government-owned lender, fell in London trading after Chief Executive Officer Stephen Hester quit and the company started to cut 2,000 investment-banking jobs.
RBS will exit its equity derivatives and structured retail products divisions, Edinburgh-based RBS said in a memo to employees today. Hester, 52, said yesterday he would step down after almost five years in the post, without naming a successor.
His exit may delay the government’s plans to reduce its 81 percent stake in RBS to late 2014, according to Bank of America Corp. analyst Michael Helsby. It may be hard to find a replacement given the political interference in how the bank is run, said Crispin Odey, whose London-based Odey Asset Management LLP oversees $9.5 billion. A panel of British lawmakers is this week considering whether to push for a break-up of the lender, which received the biggest banking bailout in the world during the financial crisis.
“The real problem for the government is that they’ve made the job look so unattractive that I can’t imagine who they are going to fill it with,” said Odey, who said he sold his RBS shares because of government meddling in the bank.
The shares declined 3.3 percent to 315 pence in London trading, below the 407 pence a share the government sees as the break-even price on its investment.
RBS said today it will cut back more complex structured products that are capital-intensive and focus risk-management in four hubs -- London; Stamford, Connecticut; Singapore; and Tokyo -- according to a statement from Peter Nielsen and Suneel Kamlani, co-CEOs of the markets business. The division is RBS’s second-biggest after consumer and commercial-banking.
After coming under pressure from government and regulators to bolster capital, the bank said in February it was considering how to shrink its investment bank further. It had announced about 3,800 job-cuts the previous year as well as plans to sell or close the unprofitable cash equities, mergers advisory and equity-capital markets divisions.
“It needs to downsize,” Deputy Prime Minister Nick Clegg said of RBS on LBC Radio today. “It can’t carry on being this huge, big hulking, what they call ‘universal bank.’ It’s got to shrink down to a size where it has got a sustainable, stand-alone future.”
RBS sped up its succession plans because of the Treasury’s desire to start reducing its stake in the lender, Chairman Philip Hampton said. Hester said yesterday he was leaving by the end of the year at the board’s request to enable a successor to be in place when the government starts selling. He told the BBC’s Today Program earlier he was a “very willing participant” in the job handover.
Hampton indicated that he might leave after a CEO has been appointed, though he has no current plans to do so, in an interview with Francine Lacqua on Bloomberg Television.
“At the moment we will want to have stability and continuity,” Hampton said. “When we’ve got a new CEO in place then other aspects of board succession will be addressed.”
Hester “absolutely understands that if you’re going to go through a big privatization exercise in 2014 you do need a CEO who’s got a good number of years ahead of him,” Hampton told Lacqua. “Banks have become more politicized now because of the financial crisis than was the case before and, if you have a government investor, that gets ramped up a bit. We want to get back to normality.”
Hester’s resignation comes little more than a month after Chief Financial Officer Bruce Van Saun said he was stepping down to run Citizens Financial Group Inc., its U.S. consumer and commercial. RBS in February said it would sell a 25 percent stake in the unit to help meet increased capital requirements.
Richard Meddings, finance director at Standard Chartered Plc and Nathan Bostock, RBS’s finance director-designate, are leading candidates to take over Hester’s job, according to Shailesh Raikundlia, a London-based analyst at Espirito Santo Investment Bank with a sell rating on the stock. Rory Cullinan, who oversaw the reduction in RBS’s non-core assets, and Ross McEwan, head of the consumer unit, were also identified as possible replacements by the Financial Times today. Bostock, Cullinan and McEwan declined to comment, an RBS spokesman said.
“Coming after Bruce’s departure this leaves an even greater element of unhelpful uncertainty at the top,” said Ian Gordon, an analyst at Investec Plc in London, who recommends selling the shares. “That will harm the restructuring.”
Hester is resigning after shrinking the balance sheet by about 900 billion pounds ($1.4 trillion) and cutting more than 36,000 jobs since he took over from Fred Goodwin amid the bank’s bailout in 2008 and 2009. He also oversaw the lender’s initial public offering of Direct Line Insurance Group Plc in October, selling about 30 percent of the insurer and raising 787 million pounds.
His departure comes as the U.K. Parliamentary Commission on Banking Standards prepares to publish its report on the industry. Lawmakers hadn’t reached a consensus over whether to recommend RBS should be broken up, three people familiar with the discussions said last week.
Bank of England Governor Mervyn King urged the government in March to split up RBS into a good bank that could fund itself and a bad bank, where assets would be transferred.
Hester said last month that he saw a “cogent” case for the government to start selling its RBS stake, even at an initial loss. The average price the taxpayer would achieve for the entire holding in RBS would be higher than the government’s rescue price, he said.
Hester will be paid 1.6 million pounds, representing 12 months of pay and benefits and won’t get a bonus for 2013, the bank said in a statement yesterday. He may also receive as much as 4 million pounds of shares as part of a long-term incentive plan, the bank said.
RBS’s shares are down 2.9 percent this year, the second-worst performer among U.K. banks. Lloyds Banking Group Plc, the other U.K. government-assisted lender, has gained almost 28 percent in the period. London-based Lloyds’s shares gained 1.6 percent to 61.3 pence today, just above the 61 pence break-even price the government uses.
Operating profit at RBS declined 29 percent to 829 million pounds in the first quarter, below the 1.2 billion-pound estimate of six analysts in a Bloomberg survey, the bank said on May 3. In contrast, Lloyds’s first-quarter pretax profit before exceptional items rose almost threefold to 1.48 billion pounds from 497 million pounds a year earlier, beating the 1.03 billion-pound median estimate of nine analysts surveyed by Bloomberg, the bank reported on April 30.