Investment banking is star of show

IT looks like Stephen Hester deserved his £1.6m bonus after all. Yesterday, the bank delivered a stronger-than-expected set of numbers, even if the mainstream media continued to fixate on the government’s decision to rubber stamp bonus payments for staff. Analysts at Nomura think RBS could end up back in the black before this year is out, a remarkable recovery by anyone’s standards.

Proponents of a British version of the US Glass-Steagall act that forced a separation of retail and investment banking should take note, however. As with nearly every other universal banking group, RBS would be in a far worse state if it weren’t for its thriving investment bank, Global Banking and Markets (GBM). It raked in full-year operating profit of £5.7bn on revenues of £11bn.

Much of this was down to an exceedingly buoyant first quarter, when recession-battered companies tapped equity and debt markets to help repair stretched balance sheets. Still, the fourth quarter wasn’t a washout either: GBM booked an operating profit of £871m on income of £2.1bn.

Meanwhile, loans to consumers and businesses – often misleadingly described as “safe” banking – continued to turn sour, helping push impairments to £3.1bn (although management is confident that the worst is over). Still, as long as investment bankers are the star of the show, helping to cushion losses elsewhere, RBS needs to hang on to them. That’s why it should be allowed to pay bonuses at market rate. If it doesn’t, hopes that RBS could make a full year profit in 2010 could be just that.