Chasing good returns in Wonderland
CURIOUSER and curiouser,” says Alice, after eating a cake that causes her to grow suddenly to the height of a giant.
It is no wonder that RBS’s beleaguered boss Stephen Hester is starting to feel like his bank operates “in an Alice in Wonderland world”, as he put it yesterday.
Unlike Alice, he has managed to magically shrink the bank’s balance sheet by a staggering £700bn in the last three years, but he has received little but abuse for his troubles.
And unlike the white rabbit, the balance sheet slashing is well ahead of schedule. Group assets now total £977bn, well ahead of 2011 £1.2 trillion target.
The fast progress is in part, Hester said, because management was “spooked” by the Eurozone crisis into accelerating the shrinkage.
He has put his fear to good use: non-core assets are even further ahead, having dropped to £94bn last year versus the £118bn target and down by £144bn since 2008.
But Hester has another reason to feel sore: despite his hyperactivity, he was forced to downgrade the bank’s return on equity target from 15 per cent to 12 per cent, which only breaks even with its cost of capital. He put this down to the Vickers Commission’s beefed up capital requirements, which have made profitability as elusive as ever.
That might be admirable honesty, but it is also depressing. In such circumstances, getting a decent return on our bailout cash is becoming increasingly like chasing after a mad white rabbit.