Dubai: Royal Bank of Scotland Group (RBS), the biggest UK government-owned bank, is restructuring its businesses across the world by selling off or closing down some non-core activities.
The bank has announced its intention to sell off its UAE retail business. RBS, a major player in investment banking and trade transactions, has more than $12 billion in exposure to the UAE. The bank chairs the coordinating committee of banks in Dubai World's debt restructuring.
On a recent visit to Dubai, Stephen Hester, Group Chief Executive of RBS, spoke to Gulf News about a range of subjects such as the bank's plans in the UAE, Dubai World's restructuring, bank bonuses and more.
Gulf News: As part of RBS' global restructuring you have announced your intention to sell off the retail operations in the UAE. Where does this leave the UAE and the Gulf region in your business priorities?
Stephen Hester: As a bank we are blind to geography. We are a global bank with worldwide operations. To me geography is not the issue. The heart of our recovery strategy globally is to focus exclusively on the businesses where we can be successful. What I call our core businesses are those where we have natural competitive advantages, where we can make good returns in a safe way. All those businesses [in which] we are less successful or those that represent excess risk, we are in the process of winding down.
That does not always mean that businesses that are non-core are bad. The retail business in the UAE is very small — we have only three branches. Even though a successful business, it is less competitive compared to better capitalised and more entrenched domestic banks.
We have three other types of business that have a presence in the Gulf. We have Coutts, our wealth management business, which is very much part of our international wealth management business. The two bigger businesses we have here are our investment banking and transaction business (trade finance and money transfer business). I don't see these as standalone Gulf businesses, but [they] are very much part of our global businesses.
Our role in the Gulf is to intermediate global capital flows between the region and the rest of the world. It could be in the form of facilitating Gulf funds to find appropriate global investment avenues or it could be helping Gulf entities to raise money in the international markets.
When do you expect to complete your exit from the non-core businesses in Asia and the Gulf?
In Asia we have completed most of our exit process except in three countries. Most of these assets were sold to ANZ [Australia and New Zealand Banking Group]. We are yet to complete the sale in Pakistan, India and China. We operate more than 4,000 branches across the world. Across these four countries, including the UAE, we operate about 50 branches. While these are very important business for people who work in them, [for] RBS as a group it [sic] constitutes only a small portion of our global business. We consider these businesses can be more successful in the hands of more dominant players in these markets.
Is your visit to Dubai linked to RBS' regional restructuring and the much talked about sale of your retail banking division?
Not really. I am here to meet our team and our customers in the region. RBS has had some well-publicised difficulties during the past 18 months due to the financial crisis. I had been spending most of my time with my colleagues to fix those difficulties, making sure that the bank was safe, adequately capitalised and was more involved in an inward-looking process.
Now I think it is time for us to become more outward-looking. This year and next I will be more focused on the bank's operations around the world, spending more time with our people and customers.
In 2008 there were talks that the consortium [RBS, Banco Santander and Fortis] that bought ABN Amro Bank was selling its stake in Saudi Hollandi Bank to Emirates NBD. Eventually the deal did not materialise. Now there are talks that Emirates NBD is interested in your UAE retail operations. Is it a done deal?
I can't really comment on that due to the confidentiality involved in our talks with parties interested in buying our retail business here. All I can say is that we are in a process of finding a buyer for our retail operation here and before the end of this year that process will be complete.
There have been suggestions that the sale of retail operations here could be the beginning of a substantial scaling down of your operations here. Is that true?
No, it is not true. But I would say that we want to be successful in every business in every country we are operating. And if we are not successful we will change things to make it successful. And this is not anything particular to the UAE alone.
As I explained earlier, a major portion of our business in the UAE is related to investment banking. We have more than $12 billion exposure to the UAE alone in support we gave to the government and companies through credit lines, bond issues, foreign exchange and fixed income transactions.
We have a really significant investment banking business here and we are intending to develop further. And I think that is going to be our focus for the future.
RBS is one of the lenders to Dubai World. The company recently announced its $24.8 billion debt restructuring plan. Are you happy with what has been placed on the table?
RBS has a dual role [in the Dubai World's debt restructuring] — one as the chairman of the coordinating committees of the banks and the other as a lender.
I do not want to make remarks on behalf of other syndicated banks because that has to be done in consultation with all involved. Although I cannot make any official statements, what I can say is that after a very difficult start, the authorities in Dubai worked very hard to develop a full proposal, taking into account the broader ramifications [of Dubai World debt restructuring] on Dubai's reputation.
I feel that the attention the authorities are putting to it and the thoughtfulness they are applying to the issue is very impressive. I think that a satisfactory conclusion will be reached. Of course, still there are some weeks and some months to go. But I think we are heading in a much better direction than initially seemed possible.
Are you happy with the overall direction of the deal?
I think the direction we are heading in is the right direction. But there are some important matters to discuss; the issue is not yet closed. We certainly are supportive of the issues that the authorities in Dubai are wrestling with. We want to help the authorities and all the parties involved to reach the right conclusion and for the future reputation of Dubai.
Following the credit crisis and the restructuring of your balance sheet, you have become a bank majority-owned by the UK government. When do you expect the government to divest [its stake] and RBS to become a widely-held corporate entity?
The government's voting share is 67 per cent and economic share is about 82 per cent. The government has made it clear that they do not want to be long-term owners of the bank. They want RBS to be successfully managed by adding shareholder value.
I think it will take several years for it become a 100 per cent privately-owned bank, as the size of our bank is very large. But our job now is to make the share attractive to investors. But ultimately the decision to sell the shares lies with the government.
There is a general criticism that despite the massive recapitalisation of banks by the government and sustained quantitative easing, the overall lending in the UK has not picked up. How do you react to this criticism?
I think there has been a lot of mistaken commentary on this subject. In every developed country in the world, after the recession individuals and companies are trying to save more and borrow less and get their balance sheets in a more conservative position. It is not only normal, but desirable that the economies in the West saved more to repay borrowing.
The press and the politicians have been going hard on bank bonuses. As the chief executive of one the leading banks in the world, how do you react to these criticism?
Well, I think that the controversy about the bank bonuses is really about investment banking. In the case of RBS we have about 160,000 employees and only 16,000 are in investment banking. Thus it is important to understand that the issue does not concern most banking sector employees.
In investment banking pay levels are very high. I have said publicly that the pay has become too high and also the structure of pay was not as well aligned with shareholder interests.
We have led the world in reforming the structure of pay by adding an equity component. Although the pay levels have come down to some extent, I would be the first to accept that the pay levels remain very high by many standards.
The crucial thing, according to me, is that if the pay is high it should not be through taking inappropriate risk, and secondly it should be justified by the marketplace and by the returns it brings to the shareholders.
The challenge for the banking industry as a whole is that the risk is better controlled in the future, there is less leverage and more equity, and that there is a better alignment between the incentives and return for shareholders.
