Steely Neelie’s got it badly wrong on RBS punishment

Nick Goodway
5 Nov 2009

Stephen Hester was clearly not a happy man when he told me that the sell-offs ordered by the EU because Royal Bank of Scotland (RBS) has received so much state aid “do not improve competition or make it easier to return money to the taxpayer”.

He admitted to having been bruised by the EU negotiations, but when I asked him if he thought Commissioner Neelie Kroes had got it wrong or gone too far he sidestepped my question, saying: “Now is not a time to go flinging adjectives around. She clearly had a different objective to our's. We need to move on now.”

I am not so diplomatic. I believe Steely Neelie has got it seriously wrong. The deal she has struck with RBS and the UK Treasury contains far too much punishment and only a very small amount of competition tinkering.

The sale of 318 branches being given the Williams & Glyn's (W&G) tag comes as no surprise. This will reduce RBS's UK market share in retail banking by 2%, in small and medium-sized enterprise banking by 5% and in the mid-corporate market by 5%. Fair enough in terms of keeping RBS's market share down to an acceptable level.

(Incidentally, if either Kroes or Chancellor Alistair Darling really views this seriously as one of the three new High Street banks they want to create they are deluding themselves. W&G is about the size of the Coventry Building Society in terms of assets. The Coventry operates out of just 48 offices with 1300 staff. W&G has over 300 branches and 6000 staff. Spot any differences?)

Back to Steely Neelie.

The forced disposals of RBS's insurance businesses which include Direct Line and Churchill, the commodities trading joint venture RBS Sempra and the card-processing business Global Market Services are all punishment.

And we are not talking a mere slapped wrist here. We are talking big, serious punishment. Added together the businesses (excluding the branches which are actually loss-making at the moment) make around £1 billion of profit a year. That's pretty significant given that in its best-ever year RBS as a whole only just topped £10 billion.

No wonder Hester says returning the bank to financial stability and profitability has been made harder.

But that's not the point. Hester will just have to work all the harder and longer to secure his bonus.

What is more to the point is that we are all, as taxpayers (84% owners), pension fund or insurance company investors (say 14%) and individuals (2%), being punished.

However much Hester says he will prevent fire sales and even talks of a stock market flotation of the insurance business, RBS is being forced to sell off three of its best cash-generating businesses — and this is all at a time when the thing its needs most is cash. It has a deadline of four years to do so or the EU will move in and sell them for it.

Now this is not just a piffling little case of blatant state aid as was the French government's £2.3 billion support for Air France in the late Nineties.

That one, in fact, came to nothing and the French continue to subsidise their national flag carrier. But the original £20 billion rescue of RBS had to be done.

In October last year not only was the bank on the brink of collapse, it could well have taken not only the entire UK but a vast chunk of Western Europe's banking system with it.

The follow-up Government Asset Protection scheme has been created not to give RBS a commercial advantage over its competitors but to ensure its survival and ultimately and hopefully its return to strength.

Kroes should be supporting that not punishing us for it. Her opaque decision making leaves us very little idea just what she's really been thinking and what she hopes to achieve.

In the words of the Mikado, Steely Neelie should “Let the punishment fit the crime”.

Rose doesn't smell so sweet at M&S but his rival Wolfson is definitely Next's best thing

Which do you prefer, the chiselled, Yorkshire features of Sir Stuart Rose or the boyish smooth looks of Simon Wolfson?

Both updated the stock market on their respective retail chains Marks & Spencer and Next this week. Both pleased their shareholders with better-than-expected updates with Next upping profit forecasts by 10%.

But the two men's views on their immediate prospects were markedly contrasting. Rose warned of a potentially difficult Christmas ahead but Wolfson sounded quietly confident.

What's the difference? They both operate on the same high streets and sell to similar consumers.

While Rose has presided over almost two years of croporate governance shenanigans and has yet to anoint his successor, the only threat to Wolfson's rule is if (as I have warned before) David Cameron drafts him into his Cabinet.

The female members of my family tell me that Rose has done little to improve M&S's range of fashion recently with a notable few exceptions in the Per Una range. Wolfson, on the other hand, has taken the recession as an opportunity to rack Next's fashion sense up a notch or two.

In the last 12 months M&S shares have risen by some 45% while Next's have more than doubled. I feel fairly confident that over the coming year the same kind of outperformance will continue.

Lloyds heading for a basket case

Lloyds Banking Group faces a logistical nightmare over its £13.5 billion rights issue and escape from the Government Asset Protection Scheme.

This will involve it sending out and receiving replies to almost six million missives before Christmas at the height of the postal strike.

Lloyds has the biggest shareholder register in the country with 2.8 million small punters.

They own an average of 740 shares each and must be asked to vote on the plans and whether or not they want to buy new shares in the rights issue.

That decision cannot be made until the rights issue price is set two days before the shareholder meeting in Birmingham on 26 November.

But I wouldn't mind betting that many of them, possibly the majority, will take one look at the documents and consign them to the wastepaper basket.