TWO-thirds of Royal Bank of Scotland's remaining stock market worth was wiped out yesterday as chief executive Stephen Hester, while declaring full-scale nationalisation a "waste of taxpayers' money" and no-one's preferred option, was unable to rule it out.
Hester was also critical of former chief executive Sir Fred Goodwin, as Royal confirmed it was on track for the worst financial result in UK corporate history. Royal flagged £7bn to £8bn of pre-exceptional losses for 2008 and an additional £15bn to £20bn hit from writedowns relating largely to the Goodwin-led acquisitions of parts of Dutch bank ABN Amro and of US-based Charter One. Less than a year ago, Royal announced 2007 profits of about £10bn.
The new chief executive said yesterday that, in hindsight, "very big mistakes" had been made at Royal. He had, just before he succeeded Goodwin in November, been much more diplomatic about his predecessor.
Hester yesterday signalled an appetite to retain Royal's up-for-auction insurance division, which includes Direct Line and Churchill. He highlighted the strength of the bank's UK businesses and, while wishing Royal to remain an international player, indicated a belief that it had been overseas that expansion had gone too far.
Although declining to say what decision would be made on Direct Line and Churchill, Hester told The Herald: "The particular way insurance companies are accounted for by banks means there is very little capital benefit in selling them."
He also flagged large job cuts throughout Royal's businesses, and made it clear UK employees would not escape.
"In a more difficult eco-nomic climate, you do less business and you need less people," said Hester.
When asked by The Herald if Royal's worldwide job cuts would run into tens of thousands, he declined to say. But he later estimated job cuts so far at "10,000 worldwide, plus or minus".
Royal employs about 16,500 of its 104,000 UK-wide workforce in Scotland. It has about 170,000 employees worldwide.
The government yesterday moved to raise its stake in Royal from 57.9% to about 70% with the conversion of £5bn of Preference shares, on which it had charged interest at the rate of 12% per annum, into new Ordinary stock.
The government is paying 31.75p per Ordinary share in this exercise - nearly three times Royal's closing price last night.
Royal shares plummeted 23.1p, or 66.6%, to 11.6p yesterday after the latest grim news on soaring bad debts and huge credit crisis-related writedowns. They traded at levels above 600p in early 2007.
At last night's close, Royal's stock market worth is less than £5bn.
Hester emphasised yesterday that he had always wanted the Treasury's Preference shares in Royal, which arose from a £20bn, government-funded recapitalisation of the bank announced in October, to be converted into Ordinary stock. He said Royal would be a "guinea pig" for the government's proposed scheme, announced yesterday, to insure banks against future bad debts in return for the payment of a premium.
This insurance scheme formed a key plank of the government's second gigantic UK banking sector bail-out package in the space of little more than three months.
However, Hester emphasised the "devil lies in the detail" of this scheme.
Asked about the possibility of a full-scale nationalisation of Royal, and an associated loss of its stock-market listing, Hester replied: "Clearly, the future is uncertain in lots of respects and that must be one of them."
However, he added the UK government had made it "very clear" in October and again yesterday that full-scale nationalisation was not its preferred option.
He told The Herald full nationalisation would "accomplish nothing", and would be a "waste of taxpayers' money".
Hester added that the only situation in which nationalisation would accomplish something would be if customers were deserting and worrying about solvency and he emphasised the government had made it "crystal clear" customers had nothing to worry about on this score.
Asked yesterday during a conference call with journalists if he believed people at Royal, including Goodwin, had lost their heads, Hester replied: "I hope I am going to try to return banking to boredom and not use colourful adjectives. I won't use a colourful adjective. People did make judgments based on a view of the world continuing to be more positive than has turned out to be the case.
"It seems right to me you can apply criticisms to these judgments."
Hester highlighted Royal's commitment to boost its UK lending in return for government support.
Royal said yesterday it would raise lending to companies and individuals in the UK by a further £6bn in this calendar year.
Hester noted UK lending had been 10% higher in December 2008 than in December 2007. And he emphasised the increase in lending this year would be greater still if Royal ultimately participated in the bad-debt insurance scheme.
Asked by The Herald if he was alarmed by Royal's 67% share price fall yesterday or if he had expected it, in light of the announcements, Hester replied: "As a shareholder, yes, I am alarmed. It is not pleasant. I think the fact is that markets are today, particularly in bank stocks, completely dominated by fear as opposed to careful analysis. I think, while I wouldn't have tried to predict any one percentage (share-price movement) or another, I think it was understandable how our announcement today would give people who are scared of things greater encouragement than those who are not."
However, he added quickly that it was "absolutely vital to distinguish between customers and shareholders", emphasising that what investors were afraid of in terms of government support was exactly what should reassure customers.
He emphasised customers should have no worries because yesterday's announcements showed the "government stands behind us and other major banks".
Asked if he believed there had been short-selling yesterday of Royal shares, a practice where traders aim to profit from a bet on the price falling, Hester replied: "I will be amazed if there wasn't, but I don't know."
Hester remains committed to Royal's Edinburgh headquarters at Gogarburn.
Asked if Gogarburn might be too big for Royal given staff cuts and a reduced head-office payroll, Hester replied:" What we would do is we might pack it more densely and close other offices and move staff into Gogarburn."
Hester yesterday emphasised he did not see Royal paying a dividend for this year.
Royal declined to comment on the subject of staff bonuses for 2008, saying there was "no update" on this at this stage.
