Philip Hampton, Chairman of The Royal Bank of Scotland (RBS), staged a robust defence of his management team at the state-owned lender's annual general meeting on Wedenesday.
Noting that the new management team is three years into transforming the company from a basket-case into a company that can be returned at a profit to the private sector, he highlighted two key challenges that faced the team when they inherited the mess left by the previous management crew.
Two key challenges"We must continue to operate a large, long-established, and complex banking group that serves 30m customers internationally ... and ... we need also to de-leverage and de-risk what was the world's largest bank balance sheet when the financial crisis began in 2007," Hampton said.
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"On job one - improving and managing our core businesses - I am pleased that our team is delivering well in a challenging market, providing financial results that compare well to our peers, and increasing the focus on customer needs," Hampton claimed.
However, the bank's recovery has not been helped by generally weak environments in the markets in which RBS operates. Profits are also under long-term pressure from increased regulation and while Hampton conceded that RBS, more than any bank, was aware of the need for effective regulatory and capital regimes, it is necessary to get the balance right.
Moving on to the second challenge faced by the management team, that of making the bank "safer and sounder", Hampton once again gave RBS a pat on the back.
"RBS was over-stretched, over-leveraged, over-exposed, and under-powered, and RBS's weakness was a major systemic threat," Hampton acknowledged. "We had to assemble a top team to address this threat, while not losing focus on the first job of running this bank," he added, before listing a number of the bank's achievements under the new leadership.
"We are rapidly approaching a 1 to 1 loan to deposit ratio and have already achieved this 'golden rule' of banking in our core businesses, and our liquidity is massively improved," Hampton said. "Our capital position has improved dramatically with our core tier 1 at 10.6% at year end," he added.
The core tier 1 ratio is a major measurement of a bank's balance sheet strength. Under the bank's former Chief Executive Officer (CEO), Sir Fred Goodwin, known as "Fred the Shred" for his policy of acquiring new businesses and ruthlessly cutting back costs, the core tier 1 ratio had fallen to just over 4%.
"We are well underway with a quiet revolution in our approach to risk, as investment in systems and training mean we ask much tougher questions of ourselves and focus on long-term value creation for our shareholders," Hampton claimed.
The thorny issue of executive payIf that all sounds like a prelude to justifying management's pay packets, Hampton touched on that too, observing that at the start of 2012 the company kicked off open-season on executive remuneration when the board approved Hampton's recommendation to award CEO Stephen Hester a bonus for his 2011 performance.
"This controversy was difficult for the business and our shareholders. I have made clear that it is a matter of personal regret that we failed to anticipate the scale of the public reaction to the issue," Hampton reiterated, before defending his decision.
"The RBS position was unique, however, in that the bonus award was supported by UKFI, our majority shareholder, and I believe by the great majority of our institutional shareholders too," he said.
UK Financial Investments (UKFI) is the company set up by Her Majesty's Treasury to manage the government's shareholdings in RBS and Lloyds Banking Group.
Seemingly acknowledging that senior executives will not do their best work unless given incentives to do so, Hampton said it is the role of the board to "recruit, retain and, as appropriate, incentivise the top quality team we need for the world class challenges we face."
"We need to do this whilst recognising both the understandable concerns arising from our unusual ownership structure, and the realities of the market level of pay for top executives," he added.
Share consolidation on the cardsThe annual general meeting will see a vote on consolidation of the company's ordinary share capital to reduce the number of shares the bank has in issue.
RBS currently has a very high number of shares in issue, nearly double that of any other FTSE 100 company. If approved, the consolidation will not affect the total value of each shareholder's shareholding but the hope is that the reduction in the number of shares in issue will help reduce volatility and dealing costs.
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