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RBS losses widen as it tries to defuse bonus row
Chancellor George Osborne welcomes Royal Bank of Scotland's smaller bonus pool for investment bankers.
State-backed Royal Bank of Scotland (RBS.L) has reported another annual loss, of nearly £2 billion, as its management sought to deflect anger at bankers’ pay packets.
Chancellor George Osborne said RBS management were 'cleaning up the mess after the biggest bank bailout in history' after the 82% state-owned lender reported a £1.99 billion profit loss for 2011, worse than the £1.12 billion loss it reported for 2010.
The result reflected £850 million in costs for payment protection insurance (PPI) mis-selling, losses of £1.1 billion on Greek government bonds and what RBS chairman Philip Hampton described as ‘weak and deteriorating economic and market conditions’.
Shares bounced around the 28p mark in early trade, up 3%, as investors digested the continued bad news, much of which was expected.
The group reported that it cut the bonus pool for its investment bankers by 58% in 2011, to £390 million, which it compared with a 54% fall in operating profits. The news comes after chief executive Stephen Hester last month turned down his bonus of nearly £1 million in response to political and public pressure.
Osborne said in a statement that he welcomed the cut to bonuses: ‘We have made clear that RBS should be a backmarker in the industry when it comes to pay, so it's right that bonuses at the investment bank are less than half what they were last year and less than a third of what they were in 2009.’
Hampton had his own message for critics of banker pay. ‘I understand people's anger and anxiety about inequalities in pay at a time when the economy is weak and many people are finding things tough.
‘We have aligned the longer-term rewards our people receive with our shareholders' interests. When we reward good performance, the amount paid in cash is minimal, with most of it paid in shares and bonds. If the subsequent results so warrant, we can claw back awards. I am confident that our practices will stand favourable comparison with others'.
The bank is overhauling its wholesale banking business, exiting unprofitable parts of the business. It is making the changes, which include thousands of job cuts, to help the bank make the transition towards ring-fencing requirements being imposed on UK banks after the Independent Commission on Banking's report in September.
Hampton said that the bank’s management will have succeeded in rebuilding the company when private investors once again want to hold RBS shares. ‘A sign that we have succeeded will be the desire of private investors to acquire the UK government's stake. While these investors hold only 18% of our shares today, their view of our performance, leadership and strategy is crucial. All being well, they will own the majority of the equity capital of the company in future years.’
Initial analyst reaction to the bank’s results was relatively upbeat. 'We continue to remain impressed by the scale of balance sheet deleveraging and de-risking at RBS over the last three years,' commented Michael Symonds of Daiwa Capital Markets, noting a reduction in the bank's reliance on wholesale markets and its strong capital buffers.
Bruce Packard of Seymour Pierce said shareholders had already endured the worst: ‘Given the dreadful share price performance over five to 10 years, we think the cost of RBS’s universal banking model has already been passed on to shareholders and customers.
Packard explained his ‘buy’ recommendation on RBS shares: ‘We continue to believe that RBS core Retail and Commercial Bank is worth at least 40p per share, which gives enough upside to justify our buy recommendation.'
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