De-Fredding RBS: what Hester should do and where

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As Lady Macbeth put it, what’s done cannot be undone. Or can it? Stephen Hester, chief executive of Royal Bank of Scotland, has started unravelling the legacy of another notorious Scot – Sir Fred Goodwin – with the sale of the group’s stake in Bank of China. In a crunch, when most assets are worth less than they were three years ago, it would probably have taken more guts not to sell the 4.3 per cent holding.

The trickier question is how far Mr Hester should go as he de-Freds RBS. The incentive is certainly there. The bank’s imperative is to reduce leverage and redeem the government’s preference shares, which pay a punitive 12 per cent dividend.

In theory, Mr Hester need not stop at the unwinding of recent purchases. Even before Sir Fred’s arrival, RBS was built on expansion and acquisition. Why not distil it down to the single office in Edinburgh’s Old Town where it traded perfectly respectably for decades before finally splashing out on a branch in Glasgow in 1783?

But while a few diehard Scottish traditionalists might welcome the purity of such a solution, Mr Hester also faces the apparently contradictory government demand to maintain or even expand lending in the UK. That leaves little or no room for drastic reductions at home.

As for the international portfolio, it makes sense to retain the joint ventures with Bank of China and the Asian presence expensively acquired via the purchase of ABN Amro, even if some of its outposts are tidied up. It’s harder to justify the Citizens Financial/Charter One retail bank network, which Sir Fred once boasted was part of the “survivor pool” of top-10 US institutions. This is no time to be a seller of US banks, but these days you need to be a very big fish to swim in that pool.

In fact, Mr Hester’s dilemma is not so much where to scale down as what to scale down. The day he took over from Sir Fred, he said RBS would remain a “very international bank”. That confidence will be harder to sustain the longer the government, with its inevitable focus on the UK economy, stays on the shareholder register. But the ability to offer a vanilla-flavoured range of services to global clients is still valuable. RBS’s problem was chiefly over-extension into dangerous products, not dangerous territory.

Beware armchair bankers

A real-life bank that people have heard of (tick) refuses to supply credit (tick) to a loved and cherished high street retailer (half-tick), driving it to the wall (double-tick). The sad story of Land of Leather seems the perfect excuse for a bit of bank-bashing.

Recessions, though, are more complicated. Some will note Land of Leather was actually debt-free, using the injured tone people apply to “innocent victims”. That is not really the point. It is hard to expect a bank suddenly to cough up millions for a business that has seen sales collapse and where blood is in the water (bailiffs spotted in some stores, credit insurance cut back).

It is vital that credit doesn’t dry up. Politicians are right to keep banks under pressure to lend to “otherwise sound” businesses (although just try defining them). What’s frustrating are the insidious ways fear of a credit squeeze feeds on itself. Companies may calculate, not unreasonably, that there will be less credit around to fund working capital.

What can they do? They can try to keep inventory levels down and arm-twist suppliers into relaxing payment terms. Suppliers may have a weak hand. But their credit insurers do not. And if the credit insurers’ risks go up (because customers are not paying as promptly), so does the chance that credit insurance will be curtailed. That in turn may force customers to pay some suppliers upfront, inhibiting cash flow.

News of this gets around. Counterparty risk, it turns out, is not just a headache for City traders worrying about credit default swaps. It is a migraine for UK business. Like deflation, once it takes hold, it can be terribly difficult to climb out of. A bit like a leather sofa, come to think of it.

Long-finger syndrome

That high-five between bullish traders may mean more than you think. Following Cambridge university researchers’ discovery of a link between finger length and high-frequency trading profit, they’re probably as likely to be comparing digits as celebrating a successful trade.

It sounds like spam: “Worried about your testosterone levels? Let down in the trading department? Satisfy your boss as he’s never been satisfied before by showing him your low 2D:4D ratio. Discretion assured.” Alas, as a predictor of performance, the study leaves much to be desired. Even in these tough times, traders boasting of their prowess will have to do so the old-fashioned way: by flaunting their bonuses.

Land of Leather: charis.gresser@ft.com

andrew.hill@ft.com

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