Royal Bank of Scotland's chief executive Stephen Hester has defended the decision to increase pay for investment bankers despite the bank making a loss last year of £3.6bn.
By Harry Wilson, Financial Services Correspondent
Published: 9:21AM GMT 25 Feb 2010
Hester, who at the weekend waived his own entitlement to a £1.6m bonus, said RBS had to walk a "difficult tightrope" as he justified the payout of £1.3bn in bonuses to the 16,800 staff working in the bank's investment banking division, where average earnings in 2009 were about £150,000.
Despite these large payouts, Mr Hester cited retaining staff as his biggest problem for the next 12 months and said the bank was still likely to see a large outflow of employees, which he described as "damaging, but not destructive."
Pay at RBS, which is 84pc owned by the UK government following a multi-billion pound taxpayer bailout, and other major British banks has become an embarrassing issue for Prime Minister Gordon Brown and Chancellor Alastair Darling, however Mr Hester insisted the decision on bonuses had been made entirely by the bank's board, following approval by UK Financial Investments, which had the right to veto any payments.
The £3.6bn loss followed a £24.3bn loss in 2008 and was somewhat less than the £5bn loss the market had been expecting RBS to announce. Much of the difference was accounted for by a £2bn one-off gain made by the bank on the curtailment of staff pension entitlements, as well as a better than expected performance in the final three months of last year.
Mr Hester said: "We are one year into our five-year turnaround plan and have taken significant steps along the path to recovery. The strengths of our core business are becoming clearer, while the legacy of losses and exposures from the crisis is running off."
A point of concern for Mr Hester and the RBS management team will be the heavy reliance on the global markets and banking business. Its GMB division accounted for about a third of total group revenues of £31.7bn, but more than half of the firm's profits before impairments.
The business, which is home to RBS's investment bankers and houses all the bank's trading operations, had a very strong year on the back of highly favourable market conditions, however many equity analysts are warning that this level of profitability is unlikely to sustainable in the longer-term.
Lending to UK businesses hit £60bn in 2009, while the bank gained market share in the mortgage market making £20bn of new loans as many competitors withdrew from the market. However, £50bn of capacity for new loans to UK businesses remains untapped and Hester said many corporate customers were preferring to pay down debt rather than take on more.
Another major issue for RBS is the continuing sale processes of several businesses. JP Morgan is set to buy large parts of the bank's commodities joint venture RBS Sempra, while the Global Merchant Servicing business is also on the block. RBS Insurace, which had been up for sale, is now likely to stay as the bank attempts to turnaround the business's performance.