RBS Names McEwan CEO as Operating Profit Drops; Shares Slip

Royal Bank of Scotland Group Plc, Britain’s biggest publicly owned lender, named the head of its U.K. consumer unit chief executive officer as the government presses the lender to shrink its investment bank.

Ross McEwan, 56, will replace Stephen Hester on Oct. 1, the lender said in a statement today. Operating profit at the core businesses RBS plans to retain fell 17 percent in the first half from the year-earlier period to 2.46 billion pounds ($3.8 billion) as investment-banking income tumbled.

The government is pushing RBS to focus on U.K. consumer and corporate banking while it considers a potential break-up of the lender as it tries to recoup some of the 45.5 billion pounds it spent bailing out the company five years ago. Hester, 52, a former investment banker who joined RBS after its rescue, announced his departure in June after the Treasury pushed the Edinburgh-based bank to shrink the securities unit.

“In the current environment, selecting a retail banker is probably seen as the lowest-risk option,” said Simon Willis, a banking analyst at Daniel Stewart Securities Plc in London. “He’s probably seen as the safest pair of hands.”

The stock fell 3.3 percent to 322.50 pence in London trading today, below the 407-pence price at which the government says it would break even on its investment. By contrast, Lloyds Banking Group Plc, 39 percent owned by the government after a 20 billion-pound rescue, is above its 61-pence break-even price.

‘Impressed Me’

McEwan joined RBS in September 2012 from Commonwealth Bank of Australia, where he ran the firm’s consumer operations for five years. The New Zealander will receive a salary of 1 million pounds. He won’t take a bonus for the rest of 2013 and 2014.

McEwan “impressed me with his vision of RBS as a strong, U.K.-centred corporate bank that is focused on supporting the British economy,” Chancellor of the Exchequer George Osborne said in an e-mail. “He’ll provide the leadership RBS needs as the bank puts the mistakes of the past behind it.”

The lender had net income of 535 million pounds in the first half compared with a 2 billion-pound loss in the year-earlier period. That missed the 605 million-pound estimate of Mark Phin, an analyst at Keefe, Bruyette & Woods Ltd.

Return on equity, a measure of profitability, fell to 7.2 percent from 8.7 percent at the core unit, while costs as a proportion of income rose to 63 percent from 61 percent.

‘Biggest Challenge’

“Even though things are going in the right direction, the pace of progress in terms of profitability is painfully slow and will be for years,” said Ian Gordon, an analyst at Investec Plc in London, who has a hold rating on the stock. “Weak core profitability is the biggest challenge for RBS.”

Profit at the investment bank, run by Peter Nielsen and Suneel Kamlani, slumped to 371 million pounds from 1.1 billion pounds. Under pressure from government to strengthen its balance sheet, RBS is cutting back the unit to focus on less capital-intensive activities, such as rates, foreign exchange and debt capital markets. RBS said in June it would eliminate 2,000 jobs at the operation. The move followed the decision to close the cash equities and merger advisory divisions last year.

“We can’t see how it is possible to be the corporate bank that we are without being able to serve our customers credibly in the fixed-income area that markets has now narrowed down to,” Hester told reporters on a conference call today. RBS said it expects the division will have a “muted year” with income “difficult” to predict.

Revenue at all but the currencies operation shrank in the first half, with income from rates falling by almost half. The Federal Reserve’s indication that it may moderate the pace of its debt purchases contributed to the decline, the bank said. Total income fell to 1.9 billion pounds from 2.8 billion pounds.

PPI Charges

RBS booked a 385 million-pound charge for lawsuits and regulatory probes, without giving further details, and set aside a further 185 million pounds to compensate clients improperly sold payment-protection insurance. That brings the cumulative total for PPI redress for the bank to 2.4 billion pounds.

Lloyds took an extra 450 million-pound PPI charge yesterday for compensation while Barclays earmarked 1.35 billion pounds earlier this week. In all, Britain’s banks have set aside more than 15.5 billion pounds for redress.

Operating profit at the U.K. consumer unit, which McEwan oversaw, rose to 477 million pounds in the second quarter from 437 million pounds in the year-earlier period. The figure was unchanged from the previous three months. Income at the international unit slumped to 42 million pounds from 167 million pounds on impairments for loans to two unidentified borrowers.

Impairments Miss

RBS’s net income for the second quarter was 142 million pounds, down from 393 million pounds in the first three months of 2013, though up from a loss of 487 million pounds in the year-earlier period.

Impairments for souring loans dropped to 2.2 billion pounds from 2.7 billion pounds, missing the 2 billion-pound estimate of Vivek Raja, an analyst at Oriel Securities Ltd. in London who rates RBS a sell. Impairments at Ulster Bank fell 30 percent to 503 million pounds as the Irish economy stabilized and are expected to “gently decline,” RBS said.

Hester, who replaced Fred Goodwin as CEO in 2008, has shrunk RBS’s balance sheet by more than 900 billion pounds and cut some 41,000 jobs out of 199,800. Assets that the bank plans to sell or run down declined to 45 billion pounds at the end of the second quarter from 53 billion pounds three months earlier and 258 billion pounds at the end of 2008.

Executive Departures

The Treasury, which is preparing to cut its stake in Lloyds, has said RBS is still burdened by too many poor assets to be sold. Chancellor of the Exchequer George Osborne is weighing plans to transfer the lender’s worst assets into a so-called bad bank. That would include unwanted businesses such as consumer and commercial real estate loans and Ulster Bank assets, according to Frederik Thomasen, an analyst at Goldman Sachs Group Inc. in London.

Hester is the third senior executive to announce his exit from RBS this year. Chief Financial Officer Bruce Van Saun said in May he was leaving to run Citizens Financial Group Inc., the U.S. consumer and commercial business RBS is preparing to take public. In February, investment-banking chief John Hourican resigned after the bank was fined $612 million for rigging the London interbank offered rate. Chairman Philip Hampton said in June he might leave after a new CEO is found.

Uncertainty over the future direction of RBS led Moody’s Investors Service to put the bank’s credit rating under review last month.