RBS boss Stephen Hester starts trying to tell it like it is - The Guardian (blog)

Stephen Hester was too shy in his early years at Royal Bank of Scotland. Now that he's been bruised by three annual rows over bonuses, he appears to have decided to jab a finger into the UK public's chest and spell out a few home truths as he sees them. It makes for more entertaining viewing.

We are told RBS contained the "biggest balance sheet time bomb in history". We are reminded that the investment banking division, even after handing out bonuses, has delivered £11bn of profits over the past three years and that RBS, if deprived of that sum, would have had to ask taxpayers for an equivalent handout or go bust.

Hester argues that RBS lives in an "Alice in Wonderland world" – his phrase – where losses are not entirely as they seem: sometimes they are evidence that another loose wire has been removed from the bomb. Thus he wants the freedom to run RBS commercially and, as he did not quite say, if you don't like the size of RBS's bonuses then take a look at what they pay themselves at Barclays.

Fair point. RBS reckons its investment bankers rubbed by on £112,000 in salary and bonus on average whereas the Barclays brethren collected £199,000. Barclays Capital, it should be said, made a better return on equity (10.4% versus 7.7%). But, yes, RBS does seem to be some form of "backmarker" on pay, as George Osborne likes to put it.

So it should be since the real moral of the tale is that neither bank's investment banking division is earning its cost of capital (a true measure of whether wealth is being created). Until that position reverses, shareholders are right to grumble that employees are helping themselves to an unfairly large slice of the pie.

But when will RBS emerge from Wonderland? When will profits be profits, rather than capital to be diverted to mop up after Fred Goodwin's tea party? For all Hester's cheer and the healthy returns from retail and commercial banking, it's impossible to ignore the fact that the RBS group still reported a thumping bottom-line loss of £1.9bn.

Well, the good news is that £700bn of assets have been removed from RBS's balance sheet during Hester's three years at the helm. That leaves "only" £94bn to go. Are these of more or less toxicity than the departed collection? It's very hard to say, which is one reason why the shares are valued at just 60% of book-value: the precise final cost of cleaning up RBS remains a mystery, especially when a holding of Greek bonds can still produce a £1.1bn charge. What can be said is that RBS would be helped greatly if Ulster Bank, still spitting out an annual loss of £1bn, can be turned around.

But the worst is clearly over for RBS. The bank is stable, boasting a core capital ratio of 10.4%, and, barring an explosion in the eurozone, it's possible to see how Hester's five-year detoxification programme will be completed on time.