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RBS boss Stephen Hester's exit sparks questions over political strategy

business Updated: Jun 16, 2013 08:56 IST

The surprise departure of Royal Bank of Scotland boss Stephen Hester, reportedly at the request of the British government, has sparked questions about the strategy for the state-rescued lender, according to analysts.

Hester's exit, revealed on Wednesday, sent shockwaves through Britain's financial sector because he had previously said that he wanted to complete the Edinburgh-based bank's difficult journey out of government ownership back to the private sector.

The announcement has fired the starting gun on a race to find a successor -- but experts warn that finding a new chief executive will be a challenge because of fears of political interference at the 81% state-owned institution.

Analysts believe that British finance minister George Osborne wanted a new face to help guide Royal Bank of Scotland's return to private ownership, which is not expected until late 2014 at the earliest.

And they warn that the subsequent slump in the company's share price -- which tumbled by more than 8% on Thursday morning -- shows that Hester's ousting could hamper the process even further.

"The share price decline is perfectly justified as markets perceive Hester's exit as a forced move by the UK government who are constantly politically interfering in order to score points," said trader Joe Rundle at ETX Capital.

"Hester was robust in his response to deliver value to shareholders... but his exit now throws in questions over how quickly a return (to the private sector) can be realised."

Royal Bank of Scotland (RBS) was rescued with ?45.5 billion ($71.3 billion, 53.5 billion euros) of taxpayer cash at the height of the 2008 global financial crisis under the then-Labour government, making it the world's biggest ever banking bailout.

Hester, who was effectively hired by the government, has earned the respect of the business community by axing 41,000 jobs, selling non-core assets and transforming the lender's balance sheet.

At the same time, unions have been scathing of his management, especially as the massive jobs cull occurred alongside Hester earning millions of pounds in salary during his five years in charge. However, he only took an annual bonus for 2010.

"The manner of Stephen Hester's departure is deeply unsatisfactory" for RBS stakeholders, said analyst Ian Gordon at Investec financial group.

"Despite persistent speculation over whether Stephen would resign, it was not his decision to leave. Officially, no front-runner to succeed him has been identified."

Hester, who will step down at the end of this year, put on a brave face on his apparent forced departure.

"We are now in a position where the government can begin to prepare for privatising RBS," he said last week.

"While leading that process would be the end of an incredible chapter for me, ideally for the company it should be led by someone at the beginning of their journey."

A bank spokeswoman declined to comment on widespread reports that the RBS chief had left at the request of Chancellor of the Exchequer Osborne.

As well as massively shrinking RBS, Hester has had to steer the lender through major controversies that have blighted the banking sector, including fines for the Libor interbank rate-rigging crisis and vast compensation for the mis-selling of credit insurance products.

"Hester on the whole was a respectable chief executive but was under constant scrutiny and pressure by politicians and the public amid scandals plaguing the bank and the toxic balance sheet that he inherited," said Rundle.

"Hester had the difficult task of deleveraging the bank and implementing cost cuts whilst defending his job and his actions."

Government wants return on bailout

The Conservative-Liberal Democrat coalition government is eager to see a return on its colossal investments in both RBS and Lloyds Banking Group, in which it owns 39% after a similar bailout in 2008.

"The general consensus is that Mr Hester has done a great job under very trying circumstances having been used as a political punch bag for much of his tenure," said analyst Michael Hewson at trading firm CMC Markets.

"It will certainly be very difficult to find a capable replacement prepared to be subject to the public scrutiny such a high profile role currently entails. I suspect prospective candidates won't be queing up around the block."

An influential committee of British lawmakers is reportedly set to call for RBS to be split into a good bank and a bad bank, where the lender's toxic assets could be unwound without endangering profitable business.

The lender was almost destroyed by its badly-timed consortium takeover of Dutch bank ABN Amro at the top of the market in 2007, just before the financial crisis struck, which left the group nursing a toxic balance sheet.

"RBS lost sight of why it was founded, and it nearly died as a result. We've got back to a place where we can once again focus on the customer above all else," Hester said in a memo to staff, sent the day after his resignation announcement.