Royal Bank of Scotland Group Plc, Britain’s largest taxpayer owned bank, has given “unacceptable” returns to shareholders, Chief Executive Officer Ross McEwan said.
“Change will not happen overnight,” McEwan told investors in Edinburgh today at his first annual general meeting since succeeding Stephen Hester in October. “It has not been a smooth ride” in the past five years, he said.
RBS has created an internal bad bank, merged units and is scaling back its securities unit as it strives to return to annual profitability and help the government reduce its 80 percent stake. The lender made a net loss of 9 billion pounds ($15 billion) for 2013 in its worst full-year results since its taxpayer bailout in 2008.
RBS is “on track” to make 1 billion pounds in savings this year, McEwan said. The bank will target a further 4.3 billion pounds of savings by 2017, he added.
The bank’s compensation policy was supported by about 99 of voting shareholders including UK Financial Investments Ltd., which manages the government’s holding in the lender. RBS said in its full-year results it would pay employees 576 million pounds in bonuses for 2013, down from 679 million pounds a year earlier. McEwan has declined a bonus for 2013 and 2014.
The vote comes after shareholders registered protests over pay at U.K. competitors HSBC Holdings Plc, Barclays Plc and Standard Chartered Plc. Barclays, Britain’s second-biggest bank, had a 2013 bonus pool of 2.4 billion pounds.
“We have to have competitive pay structures to get top people,” RBS Chairman Philip Hampton told investors at the meeting. “The more challenged the bank is, and this is a very challenged bank, the more you do need the very top talent.”
RBS didn’t seek shareholder support to pay bonuses of as much as twice fixed pay to senior executives to comply with European Union rules, unlike some other banks that sought and won investor approval. UK Financial Investments, has said it would veto any such proposal.
HSBC, Barclays, Lloyds Banking Group Plc and Standard Chartered sought and won investor approval to pay bonuses of as much as twice fixed pay.
“It creates an additional difficulty” for RBS, Gary Greenwood, an analyst at Shore Capital, said by telephone. “The bank needs to be competitive to get itself out of the problems it’s got. It needs to be able to attract and retain key people.”
Investors voted to allow RBS to pay 1.5 billion pounds to the British government to scrap the state’s rights to preferential dividends. The so-called dividend access share is seen as a barrier to ordinary shareholders receiving dividends and therefore returning the lender to the private sector.
“It’s another of those hurdles we’ve gone over,” McEwan told reporters after the meeting. “It was an important moment.”
RBS is preparing to sell shares in its Citizens U.S. consumer bank this year in an initial public offering to help bolster capital. McEwan said an IPO was a better option for RBS than a sale of the unit to a trade buyer or to private equity.
Hampton said RBS would remain based in the U.K. in a “transition period” should Scotland vote for independence in September. The Bank of England would remain its lender of last resort and the U.K. would be its “sovereign domicile” in a period when the British and Scottish governments enter negotiations on how to separate, he said.
“There is a great deal of uncertainty,” Hampton said. “We are having to consider the possible business implications.”
RBS, which is based in Edinburgh, said in its annual report that Scottish independence would “significantly impact” its credit ratings and could also affect the “fiscal, monetary, legal and regulatory landscape.”