BY CONRAD TAN

STEPHEN HESTER

Chief executive of The Royal Bank of Scotland Group, 59

• 1950 Born Dec 14
  
  
• 1982 First job as chairman's assistant at Credit Suisse First Boston (CSFB)
  
  
• 1991 Made co-head of CSFB's UK investment banking in 1986, co-head of European mergers and acquisitions
  
  
• 1993 Co-head of CSFB European investment banking
  
  
• 1996 Appointed to the executive board of CSFB, as chief financial officer
  
  
• 2000 Head of CSFB fixed income division
  
  
• 2002 Joined Abbey National as finance director
  
  
• 2003 Made chief operating officer of Abbey National
  
  
• Nov 2004 Appointed chief executive of property group British Land Company
  
  
• Feb 2008 Appointed non-executive deputy chairman of nationalised UK lender Northern Rock. Resigned Oct 1, 2008 to join RBS as a non-exec director
  
  
• Nov 2008 Becomes RBS group CEO. Steps down as CEO of British Land
  
  
• Married with two children

IT IS difficult to envy Stephen Hester, the chief executive of the Royal Bank of Scotland, for his job. Both he and RBS have come under intense scrutiny since he took over the helm of the troubled bank in November 2008, shortly after US investment bank Lehman Brothers collapsed and sent financial markets worldwide into a tailspin, forcing the UK government to bail out RBS.

More than a year into the job, however, he appears to have found a tentative sense of calm. 'I believe the worst is over for RBS, for two reasons. First, I think the worst is over for the world economy, and of course, the vast majority of what happened to us, as with other banks, was driven by the world economy. Second, the key steps that we have taken to chart a path to our recovery and put in place key support measures are beginning to work. So I think the worst is behind us.

'That is not to say that recovery will be instantaneous, either for the world economy or for RBS, because I think there are still important adjustments for both to take place in the coming years.

'I expect all of our core businesses, our ongoing businesses, to be profitable throughout. They're strongly profitable this year and I expect that to continue and to get better. However, we will make losses for a while in our discontinued activities and that probably means that the group will make a loss - both in 2009 and 2010 - and then return to profit after that.'

The crisis has undoubtedly taken its toll on the group. Last August, RBS sold off its retail and commercial (small and medium enterprise) banking business in Singapore and elsewhere in Asia to Australia and New Zealand Banking Group (ANZ) for US$550 million. In the third quarter, RBS reported a net loss of ?1.8 billion (S$4.1 billion), although core businesses - those it wants to keep - made operating profit of ?1.2 billion.

'The decisions that we made around what would be our ongoing core activities and what would be non-core was really based on the simple business principle that you should do things that you're really good at, and let other people do the things that you won't be so good at,' Mr Hester says.

'When we looked at the businesses that we had here in Asia, we saw that the retail and commercial businesses that we had acquired with ABN Amro, while they arguably had attractive growth rates, had very marginal market shares in the markets they were in. An example is India - we were 0.5 per cent of the Indian retail market. So it was my judgement that we could never be important players in those industries, and to my mind, unless you can be a top-tier participant in a mature industry like financial services, you shouldn't do it. So we chose to exit them because we felt that in the hands of other people they would be better looked after, they would be stronger, but it was better for us to concentrate on the things that we would be good at and top-tier.

'That leaves us with three global businesses in Asia - our investment banking and wholesale banking arm, our global transaction services business, and our wealth management business.

'What we really see ourselves as bringing in Asia is straddling global capital flows and the expertise that comes with that. Asia's position in the world is really all about global trade and global capital flows and each of those three global businesses has a strong role to play here.'

He also believes that giving up its retail presence - and the brand recognition that comes with having branches on the street - won't hurt the group's chances in the region. 'If you look at wholesale businesses - our global businesses here are really wholesale, we're dealing with companies, governments and high net worth individuals - actually by far the best way to get to them is not through advertisements, TV spots or branding in the street, it's through personal contact, because there aren't many (such clients). We're dealing in the thousands, not millions.

'I think there's absolutely no necessity for a retail presence in order for us to be effective in global wholesale businesses.'

But it's clear that the pain is not over. Asked if further staff cuts are likely, he says: 'The short answer to that is yes.'

'There isn't one rule for the rest of the world and one rule for financial institutions. And everywhere across the world, companies in every industry, in every country, need to be efficient and are having to adjust their business model to the changes in the world economy. Sadly, efficiency tends to mean getting lower costs and that tends to mean a people cost. We are not exempt from that process, nor should we be.

'However, a guiding principle of our restructuring plan has been to do all the disruptive, difficult, unpleasant stuff, upfront and to give as much time afterwards for the company to settle down and redevelop consistency in its recovery.

'We have a five-year plan (announced February 2009, after completing a strategic review launched in November 2008 when he joined RBS), we're now one year into that five years, and I would hope that within the first two years or at most two and a half, the difficult stuff would be done, leaving the second half of the plan to reap the rewards. We are well over halfway through all of our difficult decisions - not just around people but around businesses - and as each month and quarter goes by, we will have a picture of greater stability.'

Despite the difficult task ahead, he strikes an optimistic note. 'In my experience, in almost any industry, it is a business truism that companies with really strong and enduring customer franchises can always be successfully brought back.'

Also, 'if we look at the architecture of the financial crisis and the implications for banks, the business model that RBS represents is, I think, the mainstream business model for the future', he says.

'I do not believe that the world will bring in a new version of Glass-Steagall - or the separation of banks into so-called utility banks and casino banks - because there is simply no evidence that it was the combination of investment banks and retail banks in the same group that caused difficulties. In fact, the evidence is the opposite.

'The overwhelming majority of bank failures have been of narrow banks - whether specialised investment banks like Bear Stearns and Lehman Brothers, or retail and commercial and mortgage banks like Wachovia or Washington Mutual in the US, or Bradford & Bingley and Northern Rock in the UK. The more diversified financial services businesses are typically anchored in a retail and commercial major market but with global businesses - often investment banking and others - added on. That's the model of Deutsche Bank, JP Morgan, or Credit Suisse - and of RBS. I see our business model as being the mainstream model - the ability to have a solid base but still intermediate the global flows on which finance is based.

'Of course, that still leaves it open to individual groups to choose what businesses they want to be in, and I think it is clear that one size does not fit all. The key is not what you do but to be good at what you do.

'I do think that people learn from mistakes. The banking industry on its own is changing fast and substantially. However, because of the unique importance of financial services to the world economy - in a sense, money is the oil that makes the world economy go round - I think it is right that banking can't be entirely trusted to the free market, and that regulation has an important role to play.

'The crisis has shown up some areas of regulatory weakness. The great majority of effort in the Basel regulatory regime over the last 30 years was around capital. The irony is that companies never go bust because they run out of capital; they go bust because they run out of liquidity. That in turn causes a capital crisis, but liquidity is always the start of the crisis, whether you're a bank or a steel manufacturer. I think that not focusing on liquidity was the weakest area of past regulation and which is being fixed.

'The other area that I think is really important but hard to come to grips with is the whole too-big-to-fail argument. It does seem to me that it is unhealthy that the world's governments were rightly afraid to let financial services companies fail. Of course, we at RBS should be grateful for this because we received support along with many other banks but I still think that that is unhealthy, and a whole series of efforts to reduce counterparty risk, through putting more activity on exchanges and netting agreements, will make Lehman Brothers and AIG situations less necessary in future.'

The UK government now owns 84 per cent of RBS, after injecting billions of pounds into the bank. That financial support, however, has a heavy price - political pressure over the way the bank is run, including control of bonus payouts and minimum lending targets.

In December, RBS told shareholders it had agreed to give the UK government 'the right to consent to the quantum and shape of the 2009 bonus pool' through UK Financial Investments, which holds the government's stakes in the banks it rescued, including RBS, as a condition for joining the state-backed asset protection scheme that insures the bank's toxic assets.

But Mr Hester refuses be drawn on whether the government's involvement could hobble the bank relative to its rivals.

'Of course, from the point of view of everyone, it would have been better if we had not needed the government's support.' But 'the benefits of that support are much greater' than the disadvantages, he adds. 'We need to be really clear that the government support, while it is temporary, is a positive for RBS and for our clients. So you'll never hear me criticise the price - the political price, if you like - of that government support.

'I think that there is also a very important alignment of interests that we will see, not just with RBS and our shareholders, but also in the case of other banks that have received state support, in the next few years. Banks, for most governments, have been a problem in the last year; in the coming years, those banks in which states have investments should turn from being a problem to being a piggy bank.

'First, we will be on a recovery path, so we won't be causing a problem anymore. Second, the dominant political issue around the world over the next five years will be the closing of budget deficits in most countries where those deficits have become large.

'If RBS can supply a way of closing budget deficits through our government's selling our shares to other investors, that's a whole series of schools, hospitals and roads that don't need to be cut.'

He believes that even if he had known in November 2008 what he knows now, he would still have taken the job.

'Call me silly if you want. I saw this job - even though I had probably a total of one hour to decide whether to do it or not - as an incredible professional challenge, probably the biggest challenge I could imagine in world business, but a challenge which I thought we could be successful at.

'This is not the first turnaround that I've been associated with and what you see is that human beings are natural optimists. People really hate being depressed and negative and they can only manage it for short periods of time. So after the initial shock of any big business disappointment, people very quickly want to be led into a more optimistic frame of mind, a more positive atmosphere. And I think the crucial job of leadership is to build a vision for the future that is attractive, to show a roadmap that is convincing to get to that vision, and in that way, to re-engage the natural optimism of people so that they have re-established purpose and they know where they and the company are going. That's the most important bit.'

The biggest change he experienced since taking over as RBS CEO 'is simply the level of public scrutiny, both on a professional, company level and on a personal level', he says. 'I'm not used to being in the tabloid press - normally I prefer the business pages. I guess that comes with the job, even though I'd prefer not to have it.

He takes a hard-nosed, pragmatic approach to the mammoth task of turning RBS around, learning from the mistakes and successes of others, rather than searching for answers in management journals or books.

'I don't see this as an academic problem - I see this as a business set of problems and there are almost no business problems where there are no precedents. You can look at other examples - some that have gone well and some that haven't - and build from those. I have to say, I can't remember the last business book that I've read.'

Off work, 'I read trashy novels', he said, though he politely declines to give examples. 'This is a very intense job, so I find that when I'm not working, I will completely switch off and concentrate on family or things which are light.' He is married with two children - a son, 13, and a daughter, 12.

While he believes that RBS is no longer in mortal danger, he is under few illusions about the task ahead. 'The challenge we now face is one of execution. The really big strategic and management decisions have been made; we are now in execution mode. The good thing about that is that there is no one thing that can explode in our face and go wrong. The bad bit is there is no one thing that if we do right, that everything is right.

'Now we are in the process of doing many hundreds of thousands of things right, all of which are doable but which have to be done in almost a military way around the world. In some ways, that's the most difficult time for a CEO because our success now is not going to be anything I do, it's going to be what all the people of RBS do.'

This article was first published in The Business Times.