Examination of Witness (Question Numbers
12 JANUARY 2010
Q40 Sir Peter Viggers: It is very
rare for programmes to slip to the left. What are the main factors
that might cause the programme to slip to the right? What are
the main problems that you envisage in meeting your target?
Mr Hester: I think that one of
the most important aspects of last year was that most of the things
that could really blow us up we got past; most of what I will
call the blow-up risks we got past, so most of the risks we have
now are ones that are likely to be setbacks as opposed to really
big blow-up events. I do think that we have particular risks over
the next few months in what you might call general election season,
because we obviously are the focus of lots of debate which can
get caught up in that, and that can be a distraction to our staff
and customers in dealing with us. I am not in any way trying to
make my previous clumsy point about politicisation because I completely
understand why I am here and why these are matters of interest.
I was not complaining but I was saying that, since your question
was narrowly on our recovering, our commercial recovery and how
well it does, as I said before, the more we can be on the business
pages for our recovery, the easier my job is to restore the share
price but please do not take that as a complaint; it is just trying
to answer your question.
Q41 Mr Plaskitt: Mr Hester, how much
tension are you finding between having to rebuild the bank's capital
on the one hand and on the other hand being under pressure to
increase credit lines?
Mr Hester: We have tried to be
thoughtful in the way we set out our strategy to avoid that tension.
What do I mean by that? It is clear that we need to reduce the
size of our balance sheet by a larger amount than any bank in
history ever has. In fact, I am pleased to report that we are
two-thirds of the way towards our target in doing that already,
but the way that we chose to do that was, instead of saying we
are going to reduce everyone by a bit, what we said was we are
going to stop altogether the following lines of business, relationships
with people and so on and so forth, and by stopping a whole bunch
of things altogether, which takes a number of years to wind off,
we can behave normally with what I call our core businesses. So
the businesses that you would recognise as our core businessour
mortgage lending in the UK, our business support in the UKare
not being constrained artificially as to their balance sheet.
Of course, they have commercial constraints in terms of pricing
but not in terms of quantum. It was very deliberately our strategy.
We will only succeed if we serve customers well and therefore
our businesses that are the core businesses on which we will succeed
in the future must be unconstrained in their ability to do that
other than through risk and commercial constraints.
Q42 Mr Plaskitt: Can you put a number
on the value of the recapitalisation you have done so far?
Mr Hester: I am not sure I entirely
Q43 Mr Plaskitt: Can you give us
a percentage point or how many billions of capital have you added
to the bank? I am talking about your capital adequacy level.
Mr Hester: I believe that we have
taken all of the capital bolstering measures that we need to take
for our plan already, and from this point onwards there will be
additional capital that will be retained once we get back to making
profits, but the major recapitalisation is done, and in fact,
the recapitalisation, the most recent part of that associated
with the Asset Protection Scheme, was sized in a way to allow
our capital to absorb the losses we expect to make for one more
year and still be enough. All of this has to be said with square
brackets because the world's regulators are tossing up the capital
rules in the air and they may come down in a completely different
way but, so far as we know now, we are well capitalised against
what we expect, and in particular against one more year of losses.
Then I hope I will turn a profit.
Q44 Mr Plaskitt: Can you quantify
it in any way for us?
Mr Hester: Our core tier one capital
ratio, which is probably now the most popular measure used, we
have presently a long-run target of 8% for that ratio. It was
running at 4% before I joined RBS. It currently is over 10%, which
gives us, as I say, some cushion for it to absorb some more losses
and still stay above our target.
Q45 Mr Plaskitt: As you know, the
Basel Committee are looking again at capital adequacy requirements,
and I am sure you are monitoring what they are doing. The reports
we are getting are that it will put additional capital adequacy
rebuilding pressures on European and British banks. Have you yet
assessed the impact on your bank?
Mr Hester: We have spent a huge
amount of time on this subject, as you would expect us to do.
It is impossible to assess where it will finish because the proposals
have not yet been made or quantified or the time period for their
introduction set out, so all we can do is engage in an ongoing
process where there is not yet clarity as to the end position.
Q46 Mr Plaskitt: Have you any sense
yet as to what the impact is going to be?
Mr Hester: The impact generally
is to make the banking industry safer, better capitalised and
to hold more capital in different forms but I do not think we
can yet quantify it. One of the places where the rubber will really
hit the road in the next year or two is that a safer banking industry
means less credit for economies and more expensive credit for
economies, so there is a tension in all of this in economic policy
makers' minds between getting what you wish for, which we might
like here and might not like the consequence of there, and I think
all of these issues have still to be worked through.
Q47 Mr Plaskitt: Do you anticipate
that the outcome of the discussions at Basel could force you to
need to stay above 8% or even 10%?
Mr Hester: All of these things
Q48 Mr Plaskitt: If you had to do
that, where would the extra capital come from?
Mr Hester: As I say, we are currently
above 10% and I hope and believe that, whatever the new Basel
rules are, there will be a number of years to get into compliance
for banks and that should allow us to start making profits again,
which I obviously anticipate that we will, and to build up the
Q49 Mr Love: Mr Hester, can I turn
to your lending agreements with the Treasury? When you entered
them in the beginning of last year, almost a year ago, do you
think they were set at a realistic level, especially considering
the financial situation that RBS was in at the time?
Mr Hester: I think they were set
at a completely realistic level in terms of our capability to
meet them. If that was your point, I have no issue at all with
our capability to meet them. The other aspect of the setting of
the level was guesswork, because what we and the Treasury were
having to do was guess what the demand for credit would be and
guess how many market participants would disappear, changing that
demand. The guess has proven to be wrong in both directions but,
in terms of our ability to have the wherewithal, most certainly
we do; we did and do.
Q50 Mr Love: Can you tell us how
well you have done in terms all of those targets?
Mr Hester: Clearly, we are only
part-way through the relevant financial year.
Q51 Mr Love: You must have a much
better idea of whether you are going to touch them.
Mr Hester: Of course. At the moment
it looks like we will handsomely exceed the targets for mortgage
lending, and the reason for that is, although there is not a lot
of demand for mortgage lending, a lot of people have disappeared
from the market and therefore we are stepping into the breach.
As it relates to business lending, the inverse has happened: not
many people have disappeared from the market, there is also not
a lot of demand, and therefore it looks like on the business lending
no-one is going to lend a material amount more even though we
would very much like to.
Q52 Mr Love: So is it a lack of demand?
Earlier on, when you were talking about the amount of money not
being constrained, you did mention risk. Which one is it? Is it
that risk has been much greater or is it that the demand has not
been there for business loans?
Mr Hester: I guess, inevitably,
that is not a black and white question because clearly, if you
were to say "I will lend you money regardless of whether
I think you will ever pay it back," you can lend more money.
I guess that is axiomatic. It must be true that in a recession
there are more people who have a troubled credit outlook who you
might worry about lending to than not in a recession. Those must
be true but what I can say as it relates to both our mortgage
lending and our business lending is that we have very, very high
rates of approval to people who ask us for money. So in mortgages
on average we give 90% of people who ask us for a mortgage a mortgage,
and the equivalent figure for businesses is 85% and those percentages
have not significantly changed since pre the recession, and so
in that sense, although risk is obviously a part, it does seem
to me that people who want money in the large majority are getting
it from us.
Q53 Mr Love: Let me press you on
that because the accusation is made specifically by the small
business groups that the terms on which the money is offered are
both high in terms of interest rates and restrictive in terms
of conditions. To what extent would you go along with that? Has
the recession made that much of a difference that it is now prohibitive
for many small businesses to take the loans that are on offer?
Mr Hester: Again, I suppose I
have to say the answer is a bit of a yes and a no, so let me explain
that. In cost terms, the average interest rate on our small business
loans is half what it was three years ago, so in cost terms it
is absolutely not prohibitive; in fact, it is cheaper. Of course,
that is because interest rates have come down, and what is true
is that our lending margins had to go up because our borrowing
margins have been destroyed and, as I said, our total profit margins
have reduced. So there has been a change; the power has shifted
from the borrower to the saver in the economy and that means some
margin changes even though total affordability has improved because
of lower interest rates. In terms of terms and conditions, I think
that the period that preceded the financial crash was one of significant
instances of unwise borrowing and lending, where the economy was
propped up by too much borrowing, not enough saving, and the banks
of course played more than a significant role in that whole process.
If you were to compare terms and conditions today with their period
of greatest laxness, they would have tightened and they should
have tightened and I think properly the criticism lies before
rather than now. The second thing that I would say to you is that
we have instructed our lending officers to try to meet people's
need for loans and sometimes therefore if a company is weaker
in credit terms than was once the case, rather than saying no,
as we might have done in the past, our people are instructed to
try and work with the company to come up with a basis on which
we can say yes. That might mean some more restrictions than there
would have been but it is better than saying no. In that sense,
as I say, I think it is a mixed answer.
Q54 Mr Love: Let me come back to
the first question I raised. You have just indicated that you
were not pricing for risk effectively before the recession so
you knew you had to price more effectively. You knew there was
a recession coming, and everybody by the time you reached agreement,
and now in 2009, we are out of the depths of the recession. Was
it realistic to say that you could reach the figures for business
lending that you agreed to and have we raised expectation where
we should not have?
Mr Hester: All of the discussions
I was involved in with the Treasury at the time were all about
trying to smooth the path of economic adjustment. It was never
about lending a particular sum; it was about trying to remove
the panic factor of people being starved from credit improperly,
which could have happened. The great fear was a disappearance
of foreign banks from the market that would leave a big gap in
provision even if credit demand was muted. Everyone accepted that
the UK had borrowed too much and needed to save more, and therefore
that the path had to be actually to borrow less and save more,
but the desire was to have that path be a smooth one where companies
had the time to adjust. As I said to you, in the mortgage market
the commitments were needed because a lot of people did disappear;
we have done way more than our commitment by stepping into a gap
that was left, which I think was exactly what we were designed
to do. That was the point of having them. That gap has not appeared
in the business market, foreign banks have not withdrawn in anything
like the extent that they did in the mortgage market, so I would
say the whole purpose of the lending commitments has in fact been
fulfilled but in different segments. It has come about in different
ways but what we were always trying to do was to smooth the path
of the economy to adjust, and I think that is how it has operated.
Q55 John Mann: How long have you
worked in this country, Mr Hester?
Mr Hester: I guess ever since
I left university.
Q56 John Mann: How long have you
lived in this country?
Mr Hester: On and off since I
Q57 John Mann: How many of your staff
have indicated that they are thinking of leaving the country should
there be any change to the taxation system this year?
Mr Hester: I am afraid I have
not taken that survey.
Q58 John Mann: You are not aware
of any who have indicated?
Mr Hester: Perhaps I should just
answer the question I think you are driving at, if I may.
Q59 John Mann: Others have given
Mr Hester: I do not have a figure
to give you. I believe that London and the UK have strong and
enduring advantages in financial and business services, some basic
ones like language and law and so on and so forth, in addition
to location and time zone, and I think that those are advantages
which have led to a very big bit of GDP for the UK, which should
be encouraged, along with other things that we need to build up,
and I do not believe that the UK's position in financial and business
services will disappear overnight because of the vagaries of particular
tax or other decisions, but I do believe more generally that economies
have to figure out what they are good at and try and do that as
well as they can and create those conditions, and that goes just
as much for encouraging pharmaceutical R&D in this country
as it would for encouraging financial and business services.