The mild-mannered duo of chairman Sir Philip Hampton and chief executive Stephen Hester have been talking up their turnaround of the bank and the prospects that it can break free from the shackles of state ownership and become a "normal" bank once again.
RBS recently floated off 30% of its Direct Line insurance subsidiary – albeit at about one-third of the price it was meant to be worth in April 2008. Last week it cast aside the comfort blanket of the Government Asset Protection Scheme (GAPS), which insured against the possible default of £282 billion of the bank's most toxic loans and helped it to avoid full nationalisation. This will save RBS £500m a year, though the move has been trailed for some time and has been achieved amid low growls of pain from existing SME borrowers who have seen – and are continuing to see – their lines of credit withdrawn as the bank deleverages.
Hampton and Hester have duly been signalling that they have found a clear path to their "promised land". This is the nirvana in which RBS can resume paying dividends, return to profitability – and most importantly, where the government can shed its 83% stake.
According to press reports, the government is keen to sell as much as half of its stake before the next general election. However, several analysts are warning that if by the next election the government sells part or all of its stake it will be a hefty loss for the taxpayer. If the bank was sold today, the taxpayer would lose around £31bn.
"Obviously, it's up to the government to decide when to sell the shares," Hampton told the British Bankers' Association (BBA) annual conference in London last Wednesday. "[But] I think it's a reasonable aspiration, and it's consistent with what we are trying to do with our restructuring, to start selling the shares before the next election."
He seemed confident that the first tranche of government-owned shares could hit the market during 2014. And he added that the bank is "on track or ahead of track" on the reform plans adopted after its £45.5bn government bailout four years ago.
Colin McLean, chief executive of Edinburgh-based investment firm SVM Asset Management, believes that, in overall terms, Hester and Hampton are moving along the right track.
"Things are improving rapidly for RBS," McLean says. "The bank is benefiting from a high degree of regulatory forbearance. The Direct Line IPO also helped. The bank's balance sheet is still huge, but 2015 is some time away, so I would not say Sir Philip is necessarily wrong to say that."
But the new-found bullishness in the bank's nerve centre in London's Bishopsgate seems out of kilter with remarks last week from Paul Tucker, the deputy governor of the Bank of England. It also seems to turn a blind eye to other serious challenges that the bank still faces, not all of which are a legacy of the Fred Goodwin years.
Tucker – the front-runner to succeed Sir Mervyn King as Bank of England governor when he retires next year – warned at Wednesday's BBA event that the banks are likely to have to increase their capital levels to withstand future crises, saying: "There is still a tangible probability, not a high probability, that the worst may still be ahead."
The dark cloud of Libor, the inter-bank interest rate, also continues to hang over RBS. Alongside many other banks worldwide, it is being investigated by multiple regulators and judicial authorities around the world for the alleged manipulation of Libor and related inter-bank borrowing rates to flatter its financial health and to win proprietary bets in the financial markets. The rigging is said to have started under Goodwin, but is alleged to have continued for a period of two years under Hampton and Hester.
Like Barclays, RBS is eager to reach a joint settlement with regulators in America and the UK. But sources suggest that RBS now looks more likely to have to go through the messier process of settling separately with the two countries' regulators.
Nomura bank analyst Chintan Joshi believes that RBS should be even more worried about the rash of civil lawsuits related to Libor.
He says: "If you run the numbers on the total interest -rate swap market, then claims per bank could reach $7 billion. That's very much in the 'tobacco moment' range. But the issue won't be resolved for a long time."
Since March, the bank has also faced the prospect of a lawsuit from the RBS Shareholder Action Group, which represents 10,000 individual investors and more than 90 institutional investors who lost money in the RBS rights issue of June 2008. Once the group has funding in place, which is expected to be next month, it intends to issue proceedings against the bank and four of its former directors – former chairman Sir Tom McKillop, former chief executive Fred Goodwin, former investment bank boss Johnny Cameron and former finance director Guy Whittaker – in the High Court in London for misleading them about the bank's prospects.
Cenkos analyst Sandy Chen says the lawsuit is problematic for Hester. Since taking over as chief executive in October 2008, he has consistently sought to distance himself from Goodwin and blame all RBS's troubles on him. Now Hester and the Paisley-born accountant are effectively co-defendants in the same case.
Another setback came on October 5 when Santander scrapped plans to acquire 316 of RBS's UK branches, which the bank was ordered by the European Union to sell as a condition of it getting its government bail-out. Hampton and Hester are livid and have said they may sue Santander. They also seem determined to persuade EU competition commissioner Joaquín Almunia – the man whose directorate is investigating the bank for alleged cartelism in the Libor market – to drop the state-aid requirement that the branches be sold.
The pair are also facing what they see as unwelcome pressure from the UK government and Financial Services Authority to sell off RBS's US arm, Citizens Financial, and further unwind the investment bank.
RBS is also facing an uncertain future regulatory environment. Paul Tucker last week called for tighter regulation of the banks, in what was widely seen as a job application speech for the job of Bank of England governor. This countered recent FSA moves to partly reverse the requirements of greater capital reserves since the economic crisis by exempting loans under the BoE's £60bn Funding For Lending scheme and tweaking the rules on overall capital requirements.
Meanwhile, Paul Volcker, the influential former chairman of the US Federal Reserve, cast doubt on the Vickers proposals to ring-fence retail and investment banking by telling Westminster's parliamentary commission on banking standards that this would fail.
Any internal barrier between banks' businesses "tends to break down over time because of pressures from the institution itself," he said, adding; "If you want to keep them separate, you should put them in two different organisations."
Nomura's Joshi believes it is extremely unlikely that RBS's shares will rise above 500p – the price at which the government acquired them in 2008 – before the 2015 general election. He therefore says that if the government is determined to give itself a pre-election boost by offloading its stake before 2015, it is likely to have to do so at a loss to the taxpayer.
He says: "The banking industry's prospects are only going to improve if private sector deleveraging stops, if exports improve, which would facilitate both private sector deleveraging and fiscal austerity, and if banks get themselves in a position where they can deliver free cash flows to shareholders.
"They're going to need to build a lot of buffers before they are able to achieve that. The final thing that needs to happen is for interest rates to rise; as long as they remain low, banks are not going to be the most attractive of assets."
SHOULD WE RENATIONALISE RBS?
THE coalition government, which holds 83% of RBS, does not see full nationalisation as a credible solution to the bank's problems. In August, business secretary Vince Cable was pushing for full nationalisation in the belief that this was the only way to ensure the bank actually lends to the enfeebled UK economy, especially to small and medium-sized firms. Former Liberal Democrat Treasury spokesperson Lord Oakeshott backed him, saying: "If RBS, the worst non-lender by far, won't do its basic job, we must nationalise it - it's not Marxism, just common sense."
But Chancellor George Osborne is hostile to such a move. And in August, a Treasury spokesman said: "The government's policy has always been to return RBS to the private sector, but only when it delivers value for money for the taxpayer."
However, Richard Murphy, a tax adviser turned tax campaigner with Tax Research UK, says the government needs to be bolder and should have nationalised the busted institution four years ago.
He says: "It still isn't too late. Full nationalisation would mean that you could put in place objectives other than just profit. The social yield would be enormous."
Murphy says that if the bank had been nationalised in October 2008, it would also have been easier for the government to rein in executive pay, which its own chairman Sir Philip Hampton last week described as "grotesque".
Mitch Feierstein, author of Planet Ponzi: How Politicians and Bankers Stole Your Future, also advocates 100% state ownership for RBS.
He says the next step post-nationalisation would need to be "absolute honesty" about RBS's balance sheet. This would require European sovereign bonds to be valued at their actual market value and a "fierce write-down" of all property-backed loans in the UK. He believes that it would emerge that the bank was insolvent and it would therefore have to be put through a bankruptcy process.
Feierstein, who is also chief executive of investment firm Glacier Environmental Fund, believes this would be harmful to shareholders and creditors, but would benefit RBS and hence the wider UK economy.
"If a company is a going concern – if its core business is fundamentally OK, just encumbered by too much debt and bad management – then bankruptcy is the place to clean it up- it is the only way to avoid the same mistakes in the future."
He says RBS would emerge from the process strengthened, and in a much better position to "invest in computer systems and in business lending, the things it has neglected for so long". He adds that the bank could then be broken up into smaller, nimbler firms to "reintroduce competition to Britain's dysfunctional banking industry".