GOVERNMENT ownership and high profits don’t exactly go together, so it wasn’t much surprise to see shares in the Royal Bank of Scotland (RBS), majority owned by the taxpayer, fall more than six per cent yesterday as the scale of its need to bow to a political master, even at a cost to its own business, became evident.
Chief executive Stephen Hester admitted to a chastening year, and it was clear who was doing most of the chastening, as the government gave an example by swiftly moving to disavow his timeline of re-privatisation by 2015.
It can’t be much fun being Hester, who wears the title of chief executive but finds himself spring-cleaning like a skivvy at the whim of a majority shareholder (81 per cent of the bank is in state hands) in possession of Downing Street’s bully pulpit.
That said, it may be even less fun being one of the minority shareholders who have to live with a company following edicts that seem more politically-driven than designed to maximise profitability. Some analysts were naturally enough calling sell yesterday in the face of the risk-averse pattern of restructuring at RBS.
One clear sign of that tendency was the plan for a partial initial public offering of a quarter of its interest in Citizens, the bank’s US banking arm.
George Osborne’s vision is for RBS to be reduced to a British bank with its investment bank arm shrunk back as well. That is, therefore, what Hester has to provide. Sadly, the US arm that RBS is looking to divest grew operating profit by 40 per cent from 2011 to 2012, and RBS’s investment banking arm grew operating profit by 68 per cent over the same period, while retail and commercial banking overall (including all that US growth) managed to drop six per cent year on year.
There is a reason people become politicians, and it is not because they know how to run FTSE 100 companies. Nor do FTSE 100 chief executives rise to the top with the dream of being run by politicians.
Such subtleties however are lost on Osborne. Fresh from presiding over the loss of Britain’s AAA credit rating, while denying that failure on one of his key targets was in any sense a verdict on his performance, our chancellor is of the view that he knows best for this bank.
Osborne is a successful politician, and no doubt he knows what corporate strategies play well in key marginals. But investors would be ill-advised to bet their portfolios on such judgements bearing commercial fruit.