CORPORATE PARTICIPANTS by dfsiopmhy6

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Contents




                                                       Corporate Participants            Page 3
                                                       Conference Call Participants      Page 3
                                                       Presentation                      Page 3
                                                       Question and Answer               Page 13




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Corporate Participants
Stephen Hester
RBS – Chief Executive


Phillip
RBS


Bruce Van Saun
Royal Bank of Scotland – Group Finance Director



Conference Call Participants
See attached list




Presentation
Phillip Hampton – Royal Bank of Scotland
Good afternoon, ladies and gentlemen, and thank you for coming to our Annual Results
presentation. We are now of course one year into a 5-year turnaround plan and I think we have
come an awful long way in that short period of time. The Board as a whole are extremely pleased
with the progress that Stephen Hester and his new leadership team, I think who are all pretty
much all assembled in the front row here; all very pleased with the progress that they are making.
In the past twelve months both the board and the management team have been comprehensively
restructured.


We have of course secured the capital base of the company and for that the strategy and the
performance targets to be met. So today’s results do represent real progress towards our goals.
In the coming year we intend to show our strengths, our core strengths, as a business in which to
invest. We completely understand the public capital support that we have makes us unusually
accountable to the public and their political representatives and we respect that in all of our
dealings, but it is also in the interest of all of our shareholders and our customers that RBS is run




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soundly and commercially. Arguably no business issue in the last twelve months has attracted
greater public attention than the subject of bankers’ pay. We understand the anger around that
and reasons for that anger; and in recognition of this I think RBS has led the way internationally
on reforming our commission structures. We received almost 100%, 99.96% shareholder
approval in December for our new bonus deferral scheme at the General Meeting we had and we
are also going to put a new long-term incentive scheme to a shareholder vote at our AGM
towards the end of April.


Uniquely for this year as part of the arrangements that led to RBS going into the Asset Protection
Scheme we also needed the consent of UKFI for the 2009 bonus settlement, where there is a
particular focus on GBM. I am pleased to confirm that after long discussions we secured that
consent yesterday afternoon. The compensation rate we feel is the most meaningful disclosure
we can give on staff costs. The settlement we reached with UKFI means that our compensation
ratio of 27% for our GBM business is competitive, whilst also recognising the particular
circumstances of RBS. I do understand that there is some interest in whether or not this ratio is
flattered or altered by the impact of deferrals, now that we have got more bonus deferrals coming
into the picture between 2008 and 2009. I can confirm that in the earnings released that the net
impact of deferrals on the compensation ratio would be to take it to 28%, so it actually makes a
very marginal difference in our particular case this year.


The Board’s decision on bonuses did take account we believe of all the relevant factors, including
the performance of the group as a whole, GBM business in particular, of course, the market
impact of policy support by many governments and central banks, in particular the capital we
needed to support us in our recovery and the overall risk position of the Bank. In securing UKFI’s
formal consent, we confirmed to them that we expect the cost to shareholders of this year’s
awards in GBM to amount to approximately £1.3 billion. The cost of the payroll tax, bank payroll
tax, which was introduced, which is in the course of being introduced, is expected to be £208
million in 2009 with a further £160 million deferred over subsequent years. The Board believes
that this settlement represents the minimum necessary to retain and motivate the staff who are
critical to the recovery of this Bank. The people responsible for the problems at RBS have left the
business and we must now focus our attention on those who are charged with restoring the
company to health and we believe that it is obvious that we need to pay them appropriately in
market terms. This is also true of course of Stephen Hester, Chief Executive; the Remco -
Remuneration Committee - concluded Stephen was eligible for a performance bonus on the basis
of the enormous changes he introduced and oversaw during 2009 and the progress against our
plan and objectives and you will hear that we are either hitting our plans or exceeding our plans in
all material aspects. He has decided to waive this bonus award given the public controversy on




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banking pay and the potential of his bonus to divert attention from and potentially weaken support
for the RBS turnaround and recovery. However, it does remain the Board’s intention over the
course of the recovery period to award the Chief Executive fairly, appropriately, and at market
levels for achievement against the targets that we have set and published, which will make the
Bank safe, successful and we hope valuable again. It is critical now that we focus all of our
attention on the remaining four years of the turnaround plan. The Board is determined and
confident that we will succeed in it.


So with that I will ask Stephen to begin the formal part of our presentation. Thank you.




Stephen Hester – Royal Bank of Scotland
Thank you, Phillip. Good morning everyone. We will try and rattle through these reasonably
briskly. Of course it is all available on our website, both the slides we have used today; the
interview with the analyst, and a huge unprecedented amount of disclosure more generally which,
I think from an investment perspective, continues to set us at the forefront of transparency in our
industry.


In thinking about, if you like, in the round on this one slide, where we are at this juncture we need
to keep as our, if you like, our anchor point what are we trying to do: we are trying to serve
customers well; we’re trying to regain undoubted strength as a bank; we’re trying to rebuild
shareholder value and enable a profitable UK government sell down over time. Those are the
three things that we are charged with doing, and one of the things that I am pleased to be able to
do today is tell you that all of the targets in that regard that we set out last summer, when we set
out our strategy, that people worried about in terms of their achievement post the disposals the
EU is making us do and post the extra capital that we will have to hold for regulation, they worried
that we might row back from them; we are not, we are today reaffirming our determination and
belief that we can hit those targets. And as Phillip mentioned, when we think about 2009 we did
meet or exceed every one of our targets that we had set in that recovery plan for the first year but
only the first year of course of our recovery.


The management team that is in front of you got in place relatively early in the year; I am very
proud of them; they are doing a great job and they give me greater confidence that we can hit the
plan. We do believe that the riskiest period is behind us but of course there is plenty of hard work
ahead and 2010 will be a hard slog of a year; but our continuing businesses, the new RBS, the
core RBS, that more and more people will see, as we strip away the things that clouded it, is a
good one; it does consist of top-tier positions in large enduring customer driven markets. We do




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believe that we can make attractive sustainable returns out of serving our customers there; we do
believe it makes sense, together provides risk balancing for us and importantly all of the things
that obscured attention from that we are having to strip away, the things that make this the
world’s biggest ever restructuring story, that process of risk stripping away, of risk reduction, is
going well. We have already got more than 70% of the way through the balance sheet reduction
that we have to do, and in fact in gross balance sheet terms in the last year have reduced our
assets by £700 hundred billion in the last year alone, which is the size of several quite large
banks in and of itself, and along with that the safety of the bank by other measures in terms of
liquidity, funding profiles and so on has improved, and we have secured that additional tail risks
report which we have not called upon of the Asset Protection Scheme.


I won’t go on about all the things which we did last year; I think we can summarise it simply: the
starting point, as you know, was a crisis: £24 billion loss, 10p share price one year ago and
chaos in our market and chaos frankly in RBS. During 2009, we put our arms around the
problem; we ensured that the essential store of value that is represented by RBS core businesses
was preserved; our customers stayed with us - we serviced them and we set out a clear roadmap
for recovery: a strategy, targets, implementation actions, We assembled the tools to do the job,
some of them which we assembled for ourselves, important ones that were given to us by the
government and from the outside world and we have begun to deliver ahead of plan but it is only
the first year of five.


Now increasingly because of the progress that we have been able to make, this very complex,
frankly not very attractive, story of RBS will become clearer, will become simpler and will become
more attractive; and we can point the way to that in our results today, although there still remain
of course plenty of steps to take along the journey. And, so focussing on what will drive us in the
future, what will drive the ability to recover £45 billion for the taxpayer and to make money for all
our shareholders of our core businesses, which despite the recession last year turned in a 13%
return on equity, doubled its profits to some £8 billion and when we think of it, and I will come on
to it more, even the bits in that area, our major retail and commercial businesses that were on
their back last year due to recession started to show signs of recovery as we ended the year.
Throughout the bank we have major heavy lifting to do in terms of cost and efficiency and that is
on track as is our balance sheet, and we do expect our retail and commercial businesses which
makes up two-thirds of our total to improve next year from the nadir that they reached in 2009.


The group risk profile I have already mentioned: we made big progress; we tentatively think - we
will say no more than that - we tentatively think that the worst is behind us in bad debt; we will still
have plenty of bad debts next year but we think that the process has started to come down and




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all of the other measures of our balance sheet are increasingly strong and healthy and
anticipative of the journey that we have still left to do.


So turning quickly to the year for the core businesses. For all of our businesses it was a
foundation year where we weren’t trying to be splashy, we weren’t trying to get short term results,
we were trying to build really good foundations for a really strong future for this bank. It was also
a banner year for our investment banking arm, GBM, as it was for others in that industry and
showed very, very clearly the business mix benefits of universal banking.


Let’s just look in a little more detail at the three ingredients. I said earlier that the essential
foundation of the new RBS is our core customer franchises, market leaders in their market and
those are intact despite all the reasons that they might not be for RBS, and this, while it is a
somewhat busy chart, shows that in pretty much every one of our businesses we either kept or
increased customer numbers. It shows that, if you like, that in the most sensitive bit of that,
customers entrusting their life savings with us; our deposit franchises are very strong, very
powerful, actually gained in market share and will be a big financial support to us in the future. As
I said, the foundation is there, we need to do better with it and build on it.


GBM had a tremendous year and what is important to say is that, unlike some of its competitors,
that tremendous year came on top of a dramatic and wrenching restructuring that was required to
put right the mistakes of the past. In the top left of the slide you see the 2007 results, which is the
previous peak year in that part of the industry for what we call old GBM, and the changes that we
made to GBM pro form it and then how we did in 2009. You can see that in 2009 we had halved
the size of the business as measured by its balance sheet compared to 2007; we had taken the
employee base down by something like 40% and yet we were able to nearly quadruple profits on
a like-for-like basis from the previous record year and nearly double the profits even if you
included the old GBM. That is the reason why we wanted to keep this business, why we
considered it valuable. It won’t often have years like this, but it shows that there is a real valuable
and important business there that helps our business mix and will help get value back to the
taxpayer. However balance is very important, and in the bottom left chart you can see that
nevertheless GBM in its early state is about a third of the group and two-thirds comes from our
more stable retail and commercial businesses; that wasn’t true in profitability terms in 2009 but
we believe it can be true by 2013.


Turning to those businesses, retail and commercial, the rest of the group; they had a really tough
year last year; in most cases profits are very substantially down as recession impacted our
customers and low interest rates impacted our income. What I am pleased to note is that there




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are early signs that a turning point has been reached, both in the economies we serve and
therefore in our results and you can see in the tea-leaf bad debts have begun to level off and
income or our income margin has just begun to rise – it is still below where it was and where it
needs to be, but the turning point we believe is likely to have been reached.


A few words now on strategy in industry and we will try and do this quickly. Banking regulation is
a huge issue for us. It is going to create massive changes in the industry and the safety of the
industry in the coming years. We are broadly supportive of all the initiatives and our plans
incorporate them. It is necessary – this industry must never again get in the position of calling on
public funds in the way that it did in the last crisis. So we are supportive of that but, of course, we
need to manage major business changes through it ourselves, and this chart simply puts out
some of the big regulatory changes that are coming along which in short, require us to hold more
capital than we would have done previously. I think in the end RBS will have triple the amount of
capital for given amount of risk than it had before the crisis.


Finally on the strategy front before then going back to risk, we set out in the summer our vision for
RBS – it is unchanged and our belief in it is strengthened. I won’t take you through the words;
you can read them later. Also, as I mentioned earlier, in the summer we set out targets for the
business; I think we are the only bank to have done this so comprehensively and clearly. We do
it not because we want to, but because we understand the accountability we have and the
transparency we must give, if you like the hope that we need to transmit to others of what we can
accomplish on the journey of returning the support to the people who have given it, and so we are
today reaffirming these targets, despite the headwinds of disposals that we had not expected and
the headwinds of extra equity that we will be required to keep that we had not planned for but we
believe that we can improve still further to meet those headwinds and reaffirm these targets.


Let’s talk about the businesses away from our core businesses, or what we call non-core, and I
think that the assertion that I will make to you is the worst has passed, there is plenty of misery
nevertheless left to be captured; that misery will cause us to make another overall loss this year
but we are past the worst and we believe that increasingly people will feel comfortable that getting
out of the remaining positions (a) can be done and (b) can be done based on the existing capital
base we have. You will see on some of these charts, progress has been good; we are more than
70% of the way through the balance sheet reduction; our liquidity reserves have come up very
substantially against any future difficulties; our counter party credit market exposures have come
down sharply and in the bottom right of this chart, you see the beginnings of what I described as
improvement in the bad debt picture as are what we call our REILs, risk elements in lending,
loans that look quite big and lose us some money, the amount of them is starting to level off in the




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last quarter. It is not victory yet; this could still have some bumps in the road, but an encouraging
sign.


In terms of our progress on the various disposals that we said we would do for the European
Union, we are comfortable with those, the most volatile of them, Sempra, we managed to get
most of it done in the last month; there are still some to do; and the others [Train] probably the UK
branches and merchant acquiring for the second half of this year; insurance not for a couple of
years and we think that is on track.


So finishing up in terms of outlook, as I have said already, we believe that the group’s value will
increasingly be powered by our core business as the uncertainties around us recede, that
process has started well and there is more to go. All of our businesses can, should and will
benefit from management action; that’s why we started so vigorously last year, and many of our
businesses will benefit further from economic recovery, and that should in the end give us that
attractive balance of two-thirds stable retail and commercial, one-third investment banking, both
adding to our value. Specifically in 2010 we do see economic recovery but we see it as being
slow, difficult, and with bumps in the road; and that is what our central planning is. Off course it
may turn out better or worse; there still are plenty of uncertainties around as I don’t need to tell
any of you. In that context, as I said earlier, we think that we can see a gentle reduction in bad
debts, a gentle improvement in our net interest margin. While we do believe there is another year
of overall a lot is ahead of us, we think the program will look good for profits thereafter. The
uncertainties are there; there are plenty around. I list them, I won’t go over them.


And so the final point, of course, this is more for the analyst but I think it is important for all of us
since everyone in effect is a beneficiary of the RBS investment case if we get it right. The
investment case for RBS is built on market leading businesses in large enduring customer driven
markets. We believe the earnings recovery from this point can be driven by retail and commercial
but with our investment banking as a key contributor. The group is well capitalised and
increasingly will come into the category of safety and stability that we have all been tasked with
and aim for. It is the turnaround story; we are planting well but there is plenty of execution risk
left. And the very fact that I see 2010 as a year of hard slog, where there will be difficulties to
overcome, there will still be losses to report, and we will try people’s patience but I believe we will
try people’s patience in a constructive way; I believe we will be able to point to hitting the target
which we set out and with the foundations of the house coming above ground level and beginning
to reach upwards.




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In thinking about how that plays through to our shares, it is of course in the hands of the stock
market and investors but increasingly as uncertainties peel away that investment case will clarify;
it will be driven by the earnings power of our core business; it will be complimented we hope by
concluding that the remaining risks are catered for in our financial structure as it is today and then
of course there are some complexities around government support which we hope can be
unwound in the outer years and all of that in the context of making good on our three goals: serve
customers well, rebuild the faith bank and restore shareholder value.


Thank you. Bruce perhaps you can take us through some figures.


Bruce Van Saun – Royal Bank of Scotland
Thank you, Stephen.
I am going to go through a slimmed down version of some of the financials that I went over with
the analyst earlier today and we will talk a little bit about core and non-core results and then a few
comments on the balance sheet.


So this slide has our consolidated group results – so I will walk through some of the headline
numbers. Comparing full year 09 to 08 results, revenue has increased by 43% while expenses
were up by only 7%; this drove an improvement in profit before impairment losses which was up
£0.5 billion from 08 to £7.7 billion in 2009. However impairment losses were up by £6.5 billion in
2009, that reduced the operating loss improvement to just £700 million. Our attributable loss in
09 was a smaller £3.6 billion reflecting gains from a liability management exercise and a
curtailment of benefits in our pension plans. Last year’s significant attributable loss of £24 billion
reflects a £16 billion goodwill and intangible write-off.


For the fourth quarter our income was up 6% sequentially and we had a pre-tax profit reflecting
the pension curtailment; all in all signs of solid progress. At the bottom on the schedule, take
note that of the progress in terms of the funded asset and the RWA reductions. Core tier 1 ended
the year a robust 11% reflecting the benefit of the B share issuance in the fourth quarter to HMT
and RWA release from the Asset Protection Scheme. Our tangible net asset value is slightly over
51p; the decline in the fourth quarter reflects the B Share issuance at 50p and also the increase
in the pension deficit.


So let’s go on and I will talk a little about our core performance. Our core operating profit was up
89% to £8.3 billion as GBM drove higher revenues and positive operating leverage was 23%.
While impairments were up by £2.2 billion, they have levelled off and they have stabilised. The
illustrative ROE for our core activities was 13% for the year, and Quarter 4 results adjusted for




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select one-time items were broadly stable with the third quarter. Scanning through the core
divisions on the next couple of slides, let me offer a few brief observations. First off, UK retail
profit before impairment loss was up 10% versus 08; we have made excellent progress in
attracting new customers and improving our service model while lowering costs and gaining
mortgage market share. Unfortunately we suffered a £600 million plus increase in impairments
largely on the personal loan portfolio reflecting weak economic conditions. The good news
though is that PBIL momentum will continue into 2010 and impairments will level off which will
drive better profitability. Our UK corporate showed stable PBIL versus 08; loan volumes were off
as customers delevered, and then dropped in the first half but rebounded in the second as asset
margins have expanded. Our expenses were tightly managed; they declined by 7%, year over
year.


Again similar to UK retail, impairments were up by over £600 million reflecting the weak economic
environment but as with retail, we expect UK corporate to perform better in 2010 with modest
growth and PBIL combined with lower impairments. Wealth operating profit was up 21% in 2009,
giving 5% income growth and tight expense management. That said, the low rate environment
and competition for deposits has continued to challenge this business. GBM was already
covered by Stephen – I think suffice it to say they had an outstanding year in refocusing the
business model and also taking advantage of market conditions. The first half of the year was
clearly above trend line but the business was able to generate £2 billion in income per quarter in
the second half which is back to trend levels. I will add that this year we are pleased with the
performance of the business so far to date.


Continuing on with GTS, our operating profit was essentially flat for 2008. Compression on
deposit margins continued, but balances have resumed growth in the fourth quarter and the
outlook is stable for this business. Ulster has had a tough year; impairments were up £500
million reflecting the weak economy in Ireland. The business has taken steps to strengthen PBIL
with pricing and expense reduction initiatives, but 2010 will be another tough year on the credit
side. The US businesses at Citizens suffered mightily from lower interest rates and higher credit
costs resulting in a small loss in 2009. We do expect actions that have been taken to bolster the
net interest margins as well as an improving economy in the US to return Citizens to profitability
in 2010.


Lastly, insurance had a tough year as net claims were up over £600 million including a £448
million additional charge for personal injury claims resulting in a steep drop in operating profit .
Significant revamping of the business is occurring on the pricing, expense, underwriting and
claims processing dimensions, pretty much the whole business, which we believe will result in a




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bounce back year in 2010. Closing out the analysis of core, a snapshot of impairments shows
that most divisions have stabilised, save Ulster, at relatively high levels. We would expect to see
some improvement over the course of 2010.


So let us move on to non-core. Year over year it is not a pretty picture. Non-core lost a little less
money before impairments, about £1 billion less, but impairments dropped by over £4 billion,
resulting in a loss of £14.6 billion. One bright spot though is that both impairment losses and
operating loss have narrowed for the second consecutive quarter. Non-core’s fourth quarter
operating loss annualises to about £10 billion so while this is still significant, the trend is in the
right direction. Our third party assets were down meaningfully in 2009 and RWAs dropped
sharply in the fourth quarter. We continue to look for economical ways to accelerate the run-
down of assets and our trading exposures.


The next slide on impairments gives more detail on losses by [sending] division and also by asset
type. While GBM and UK corporate drove the biggest losses which were centred around property
and manufacturing assets, we expect impairments to remain at relatively high levels in 2010
given the nature of these legacy exposures. Total assets in non-core declined from £343 billion
to £221 billion over the course of 2009. Of the reduction £53 billion was in derivatives and £65
billion was in third party assets, of which disposals and run-off accounted for £47 billion. Now this
is £15 billion ahead of non-core’s 2009 TPA reduction target.


Let’s move on and I will touch briefly on the balance sheet funding and capital. The total balance
sheet has decreased by almost £700 billion since the peak; about half of that is in funded balance
sheet and the other half is in derivatives. As you know, we bolstered our capital ratios through
issuance of the B shares to HMT and APS in Q4. As a result our leverage, our low deposit, TCE,
core tier 1, all these ratios are certainly much improved versus a year ago. We still have work to
do however to enhance the quality of our liquidity portfolio and to continue to lengthen the
maturities of our [audio]. This will continue on a steady but gradual basis over the planning
horizon but the costs are already included in our NIM guidelines which I gave earlier.
New liquidity and the funding guidelines by Basel and the FSA are directionally in line with our
plans. On the capital front we gained 5.1 percentage points of core tier 1 during 2009. The
biggest positives were B Share issuance at 4.4%, the net APS RWA relief of 1.6%, and the
liability management exercise in the first half of the year also 1.6%. These more than offset
attributable loss and other impacts.


So let me conclude by offering you a few key takeaways. Again, our core franchise performed
very strongly in 2009; operating profit was up 89%; that was led by GBM, we think there will be a




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rotation and UK corporate and UK retail will start to have momentum going into 2010. Our net
interest margin continues to strengthen, that was under pressure earlier in the year, but it has
expanded now for two quarters in a row; group impairments have shown signs that they have
peaked; our capital position is very strong; our balance sheet risk has been reduced - we have
more work to do there but we are making good progress - and again retail and commercial, along
with lower non-core losses, should benefit our 2010 performance.


So that would be it for our presentation and we can take some questions.


Thanks Bruce – we have some roving mikes but if you could give your name, rank and serial
number before you ask a question, that would help.




Questions and Answers
James Moore - The Independent
Stephen, you said this morning that because of the people you had lost from GBM, and you said
that thousands had been out the door, that you would have made a billion more, how would you
quantify how you would have made, where did that number come from and where is this extra
billion, what parts of the business would that have been made from?




Stephen Hester – Royal Bank of Scotland
A. I don’t want to really make a big deal of that comment; it was an off the cuff comment and I am
not trying to make a political or otherwise point; if you lose people business is weakened and
there is revenue that you lose but I have to say I believe that overall we have struck the balance
right; there were always going to be difficulties arising from our collapse in retaining people; those
difficulties of course are going to be in some way compounded by if you like the public debate
around us but on the other hand our existence is here because of that public debate so I think I
described the losses of people as damaging but not yet destructive and I still think that this the
right way to think about it so it is impossible to put a price on it and I think that the more important
thing to say is that we have today reaffirmed our targets; we have also performed well last year –
whether we could have done better still no one will ever know but we are determined to do well in
the future.




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James Moore - The Independent
So are you disavowing those comments now?




Stephen Hester – Royal Bank of Scotland
That was my best estimate. Call it a guess if you like as it is unprovable.




James Moore - The Independent
And how many people would you have lost in total, would you say?




Stephen Hester – Royal Bank of Scotland
I don’t have at my fingertips the amount – what we have said before is that it is focussing less on
the number of people who have left the staff but the…[operator interruption] attracting good
people and retaining good people is the single most important job I have in order to get the
taxpayer their money back. Now that is not the same as saying we should overpay people or
pamper them or anything like that. We need people to perform for us in order to be rewarded but
people and its management is an important topic and one which will again in 2010 be one of our
biggest tasks.




Jill Treanor – Guardian
I want to ask you Stephen, you have talked about the politicization of the banking before, how
much is politics involved in the size of the bonus pool that you are ultimately allowed to use and
could you also explain how you’re paying staff in the retail banks, I know in the past it has not just
been investment banks; and I have a question for Phillip as well.




Stephen Hester – Royal Bank of Scotland
I completely agree with the Chairman’s opening statement which is to say that we owe as an
institution far more to the support of the outside and the government and the capital support that
has come with it than its cost, and I was probably wrong to bitch about it, but nevertheless the
clarity is there I think for all of you to see that in the end in the interest of all of us it is for RBS to
return to a very strong commercial position and it is only through doing that the taxpayer will see
its money back and so in that sense sometimes I have to be a little tunnel-vision in terms of
pursuing RBS’ commercial interests, because that is the only way that the money will come back.



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What I think that I can say as Phillip has already said is that the pay recommendations for 2009
were arrived at by the Board and accepted by UKFI and in that sense, we believe that we are
able to say that we are managing this bank commercially to our shareholders, all our
shareholders and our people; however that process was done, we hope, responsibly; the
numbers were certainly reduced reflecting a whole series of issues that Phillip enumerated in his
statement whether that be bonus tax, public support, the ease with which money was made, and
so on and so forth; and I think that any of you who look at the relative, if you like, compensation
ratios, in other words what we pay for what the shareholder gets, can see that we have tried to be
restrained, as we should be, of what is a difficult and wrenching balance, so I think that is really
all I have to say on that. Obviously in the rest of our business interestingly the compensation
ratio as you can see is higher in the rest of our business than GBM but that is because we have
many more people - 140,000 - paid much less individually I think Andrew told me once that the
average pay is below that of a bus driver or something in the UK, so we have very different
businesses in different parts of the world that have different characteristics and obviously the
bonus issue is overwhelmingly one that relates to the investment bank.




Jill Treanor – Guardian
Sorry I still have the mike so I was going to answer the Chairman a question very quickly: You
talked about the fact Phillip that you expect to pay Stephen Hester over the long term even
though he is not taking his bonuses this year, can you talk about how his incentive is going to
work in the future then.




Phillip Hampton – Royal Bank of Scotland
Not in any detail at the moment; we are about to complete the negotiations we are having on the
long term incentives, and as I said, at the start they will be put to shareholders in April. I can’t
comment until those discussions with institution investors and UKFI are completed. What I was
keen to say was that this decision of Stephen was entirely his decision and the Board still have a
policy of rewarding Stephen at market rates and if Stephen wants to waive it, that is obviously a
matter for him but it doesn’t change the board’s policy about what we think that we should pay
him. The board I think would be in a very bad position if Stephen decided that he wasn’t
adequately remunerated and decided to work elsewhere in an easier job; so our policy is to pay
all of our people starting with Stephen at market rates, and we are reaffirming that despite his
waiver.




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Sharlene Goff – FT.
I just want to raise the subject of lending particularly to businesses which was clearly made very
difficult last year because of the spike in repayments – I wonder what type of picture you are
expecting this year and whether the targets set by the government were likely to change?




Stephen Hester – Royal Bank of Scotland
I think the first thing I should say actually is I think that there are two pieces of good news in 2009
before I move on to 2010 although I am sure that people who want to criticise will not accept my
analysis. The first is that we actually lent in the UK £80 billion of new lending last year, of which
£60 billion was to businesses and there is a further £50 billion that is available but not yet drawn
upon in terms of lines given to our customers and that lending is something like double what
some of our near competitors did. So we were very pleased to be able to fulfil both the letter and
the spirit of what we said we would do and lend to credit-worthy customers at market rates where
there was a demand for that lending. Now it seems very peculiar for a banker to bemoan what I
am about to bemoan, but at the same time, what we were unable to do is stop our customers
wanting to pay back their loans when they were able to, and so in the case of our business
lending, our customers paid back pretty much as much as we had lent on the other side. Now
from an economic standpoint we should all be happy about that; we are where we are because
we were one of the economies that didn’t save enough and borrowed too much and the process
of deleveraging and becoming safer is one that we shall want to have happen – it happens to be
that as we say people are paying us back the loans as fast as we can shovel them out the door
up on the other side. The issue of credit stress is of course a real one. In aggregate the best
way of thinking about credit demand is through our own overdraft – why do I say that, because if
you have an overdraft from us and there is £30 billion of overdraft we grant to businesses in the
UK. If you have an overdraft from us you can draw it down and get money without asking us at
all, you just do it, it is there for you so there is no question of filling in forms, or extra costs or
anything like that, and actually rather than take any extra money from us through overdraft
drawings, businesses pay down their overdrafts last year as well as their normal loans which is
why we are very clear that the issue, in common with every other country in the industrialised
world, is one of weak demand for lending as businesses try to make themselves safer in the face
of a weak outlook for selling their goods and services. Now of course there is a minority of
customers who are facing difficult times in lending – in some cases there are ones we can’t
responsibly lend to because we think we won’t get the money back; in other cases we are finding
ways to lend the money but with more strings and that I think is an inevitable part of the recession
but we are very clear: RBS is open for business; we are making loans; we want to; we have all




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the capital needed to do that and that’s our posture in 2010 as well as in 2009. In the opening
months of 2010 the pattern is not really changed from that of the closing months of 2009; that is
to say that we are making healthy gross lending in the mortgage market because we have gained
substantial market share through the disappearance of others and that is also net even though
the mortgage market in itself is not growing; in the business market people are still paying us
back at more or less about the same that we are able to shovel out the door early stages. So I
think all of that is consistent with the broad economic outlook of sort of slow, difficult recovery, but
recovery nevertheless.




Sharlene Goff – FT.
Just one more thing, have loans become more expensive for businesses and overdrafts as well?




Stephen Hester – Royal Bank of Scotland
The average interest rate charged to our business customers is half what it was a year and a half
ago. However, the margin we charge within that interest rate has gone up and the reason for that
is because our input cost, the cost of us borrowing from other people, most notably savers has
also gone up, and so as Bruce mentioned, the total amount of money that we take out at the
middle between savers and borrowers is down but is beginning to stabilise; we need to rebuild it.




Clara Ferreira-Marques – Reuters
I have a couple of questions: one on the bank branch sale – you mentioned earlier this morning
that there was less of a queue for the bank branches [queue] buyers than there was for WorldPay
– what makes you confident in that case that you will be able to see it this year and complete next
year given the complexities that are involved?




Stephen Hester – Royal Bank of Scotland
Well, I think of course it would be wrong for us to be confident about anything that is not under
our control but we believe that, looking at it today, our timetable is the one that you have sketched
out and there are enough interested parties today for us to believe that we can sell it successfully
but of course you know that depends on some things to happen in the coming months.




Clara Ferreira-Marques – Reuters



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Can you put a value on the business?




Stephen Hester – Royal Bank of Scotland
I think it is too early to do that.




Clara Ferreira-Marques – Reuters
Just a final one on lending – to come back to that, there is a lot of talk that the government will put
more strings or, rather, impose penalties if you don’t achieve your targets because at the moment
if you don’t achieve your targets, there is not much that they can do; and the Conservative Party,
who may or may not win the next election, are talking quite strongly about that as well, what can
you do as a bank – that would involve you lending to non-credit worthy people – how would you
meet those targets?




Stephen Hester – Royal Bank of Scotland
I think obviously that mischief is being made on this subject but you know as far as I am aware
we have no issues or disagreement with the different departments of government; they have full
transparency with regard to what we are doing. We are clear: we are open for business, we’d like
to lend this money, we have the money to lend and we are trying as hard as we can to support
our customers. What we are not doing is lending to people that we think won’t pay us back. If
there is a role for that kind of public subsidy we suspect it isn’t through the vehicle of commercial
banks but that obviously is a separate political debate. The lending agreements are legally
binding, we can be sued by the government if we were thought to have breached them; I believe
we have lending agreements as I said in letter and spirit.




Richard Tomlinson – Bloomberg
Why were profits and assets under management down in the fourth quarter in the wealth division
– are customers losing confidence in Coutts and RBS Coutts as state owned private banks?




Bruce Van Saun – Royal Bank of Scotland
No, I think part of the issue there is the compression on deposit spreads; it is highly competitive
for deposits in the wealth space so that was part of the issue; we’ve also seen some clients




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moving their money out of riskier assets into safer assets like money funds and the like, and so
that was some of the drive for the lower assets.




Stephen Hester – Royal Bank of Scotland
I think what we should also say because it was in the press – one of the areas we have had
particular people retention problems is in wealth management. We had a very large walk-out in
Asia of private bankers over the subject of pay and that led to some specific loss of assets under
management in Asia. We think we can build that back but that was also a feature in the fourth
quarter.




Richard Tomlinson – Bloomberg
Just a quick follow up for Stephen Hester – do you think that it is appropriate that a bank that is
mostly owned by the taxpayers should be operating private banks with branches in offshore
locations, like the Channel Islands, Monaco, and other places like the Cayman Islands?




Stephen Hester – Royal Bank of Scotland
Well, I think that we have been very clear and that we are entirely supportive of all of the
government initiatives on transparency, on tax stream across border, on the tax code, on the
voluntary tax code that’s being brought in for banks; and we don’t believe that we are engaged in
any activity that is inappropriate.


Philip Hampton – Royal Bank of Scotland
I think it is also important to add that we think that the ownership is temporary.




Katherine Griffiths – The Times
Just on lending commitments again – do you expect for 2010 to be at the same level as 09 and
how will that be calculated if not?




Stephen Hester – Royal Bank of Scotland
I don’t know the answer because we are still in discussion. I suppose our posture is really on the
one hand we don’t mind what they are because you know we want to support our customers and
within any of the sorts of numbers they might be we have the wherewithal to do that and so we



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are very happy to say if there should be demand from creditworthy people of that amount, fine,
we’ll lend it, that’s terrific, no problem. It is an entirely separate issue whether we think that there
will be demand or, more to the point, whether we think it will be to the same pattern of some
people borrowing and other people paying back; I do think that while 2010 may see more demand
for lending it’s not likely to be dramatically more but we are very happy to make available
significantly in excess of that should we be wrong in that outlook.




Phil Aldrick – The Telegraph
I just wondered if you could give us some idea much it is going to cost to run down the non-core
business because with its £14 billion losses for this year it is going to be a very expensive
process; and just on GBM you do say that this year’s performance is unsustainable – is it going to
drop off rapidly, the profits in that division, and is building the business for the future going to be
hampered by the decline in GBM?




Stephen Hester – Royal Bank of Scotland
A. I think on non-core I think it would be really too early to add it up other than to say it is a
number you probably wouldn’t want to hear even if I did add it up; we have given some guidance
for 2010 in terms of the overall balance for the group and we have given guidance in terms of our
capital ratios out to 2013 but I really don’t at this point want to be more specific.
On GBM, the one thing that’s always been true in investment banks is that revenues are deeply
unpredictable year to year, which is why I only want a third of the group from what is a valuable
source of earnings but a volatile one, and so making predictions for this year are bound to be
wrong – I just don’t know by how much. Our working assumption is a steady state for GBM which
is something a little over £2 billion of revenues per month, sorry per quarter, per quarter, that is
what GBM did in the last three quarters of last year and that would be our base working
assumption from which years can be better or worse. I think it is still too early: January started
well above that trend but it is still too early to make a more solid forecast.




Becky Barrow – The Daily Mail
I am sorry to go back to the subject of bonuses but just to be clear you have got 16,800 bankers
in GBM and they share a bonus pool of £1.3 billion. Can you guide us as to how many of those
bankers received a bonus of more than £1 million?




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Stephen Hester / Philip Hampton – Royal Bank of Scotland
No.




Becky Barrow – The Daily Mail
Because you don’t know, or because none of them received a bonus of more than £1 million?




Philip Hampton – Royal Bank of Scotland
Why do you want to know?




Becky Barrow – The Daily Mail
It is always interesting. You know, it must exasperate you our obsession with bonuses but I
would say that a lot of people who own this bank ie. office tax payers, receive a basic salary of
£25 000 per year and don’t get a bonus. So, I think it is a legitimate question and it would be very
interesting to know the answer.




Philip Hampton – Royal Bank of Scotland
I am not sure it is an important business question but it may be a matter of public interest, in fact I
am sure it is. It would certainly be a good number of people, but I would much rather not put a
specific number on it. We are certainly into more than 100.




Becky Barrow – The Daily Mail
Thank you very much.




Sarah Munoz – The Wall Street Journal
I wanted to ask about the APS – if I understand it, you signalled this morning that you actually do
not feel like you will be utilising the government’s insurance on those toxic assets and I am just
curious the progression; I believe when you entered this scheme you said that you sort of saw it
as catastrophic insurance at that point, whereas six months prior you said it was fundamental for
the bank – so does that mean that actually you will still be participating in this scheme and see it
as catastrophic insurance or will you try to exit the scheme and pay the exit fee, and if so what




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will happen to the B shares that were issued to the government when you verified this in
November?




Stephen Hester – Royal Bank of Scotland
I think it was a logical progression – the B shares are completely detached; they happened to
come with the package but they no longer have any relationship whatsoever to it. In February of
last year when APS was designed, it was designed in what I might call in industrial strength and it
was needed for the crisis conditions and we thought we’d draw on it. Because our efforts had
improved things at RBS and the markets had also improved, by the end of last year when we
came to enter it, we were able to substantially restructure APS so that it was much cheaper, a
much lighter touch; and we said then that we intended, that we believed, we would not need to
draw on it but it was nevertheless necessary in order for us to pass the FSA stress test which we
have to do and so all we are doing today is simply repeating what we said at the end of last year
that we still see ourselves not likely to draw on it; it is still today necessary for passing the FSA
stress test but our management plan is to exit it within the context of our 5 Year Plan in 2012 or
2013 and that is what we are currently hoping to do.




Sarah Munoz – The Wall Street Journal
So, no plans to exit it before 2012?




Stephen Hester – Royal Bank of Scotland
You can’t rule anything out but that is not currently our plan.




Sarah Munoz – The Wall Street Journal
Thank you. I also wanted to ask about Dubai with regard to your exposure. I am curious on how
the negotiations are going, whether you have actually reached a standstill agreement, whether
you feel one is necessary and whether it is true that RBS is taking the lead on those negotiations
for the UK creditor banks?




Stephen Hester – Royal Bank of Scotland
We are chair of the Creditors’ Committee and as I understand it, I may not be absolutely up to
date; we are awaiting proposals from the creditor.



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Sarah Munoz – The Wall Street Journal
Have you reached a standstill agreement?




Stephen Hester – Royal Bank of Scotland
I think we are awaiting proposals.




Tim Sharp – The Herald
I wonder if I could just go back to the stuff on jobs; I wasn’t too clear as to what figures you had to
your fingers or not; are you able to say how much your workforce has shrunk by over the past
year and give an idea of how much, how far through the process of slimming down the workforce
you are and secondly on the issue of bonuses, do you think that the bonuses you have agreed
just now for 2009 will be sufficient to stem the sorts of losses you had of top staff last year?




Stephen Hester – Royal Bank of Scotland
With respect to job losses, I think the number of people who actually left us last year was 14600
and obviously all over the world; and the announcements that we made add up to more than that
because obviously there are a whole series that are in process for this year. I would hope that
the process of job losses has less than eighteen months to go in it but there still are smaller but
material job losses to come which are in the works. Our policy remains as it has always been to
talk to our people first and not to give out numbers in the press until we have done that.
With respect to payments, my guess is that this year will look like last year in terms of staff
losses, my guess is that we will lose uncomfortable amounts of staff this year but I hope that we
have done enough to keep it in the damaging but not destructive level, but that will be a very high
priority management task to work on in the coming months.




Patrick Hosking – The Times
I’m sorry – I want to return to the wretched subject of bonuses – I have tried to do a little bit of
back of the envelope calculation – your GBM people are getting about £80 000 in bonus on
average, if you add in base pay of what, £80 000 again, I am completely guessing, on average
your people in GBM will be taking home about £160 000 – do you think that is a fair guesstimate?
Second question – how much does a UK bus driver earn since you raised the subject and third



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question – do you think that in the light of Lord Turner’s comments that GBM bankers are more
socially useful than bus drivers?(laughter)




Philip Hampton – Royal Bank of Scotland
Well, I think your back of the envelope calculation in terms of split of basic pay and bonuses is
about right, you know, it is broadly fifty-fifty overall. Of course, quite a few people working in
GBM will not get a bonus at all so the proportion is split amongst a slightly smaller number of
people than the 16,800 people who are employed there but your basic arithmetic I think you got
to very quickly. Bus drivers earn £15 000, aren’t they? £21 000. But I think you need to deal
with GBM bankers, I think, Stephen – are they socially useful?




Stephen Hester – Royal Bank of Scotland
Pass. Are journalists socially useful?
(laughter)




Philip Hampton – Royal Bank of Scotland
Our own GBM bankers have made enormous profits in the last year, we can say that; whether it
is socially useful to make substantial profits – maybe people have different views on that.




Stephen Hester – Royal Bank of Scotland
Patrick, let me be less flippant. The new GBM, the GBM that we have brought forward, is built
entirely around customers; there is no proprietary trading; the if you like the things, losses, and
the complex things that brought us down are closed. And we are in business only to serve
customers in GBM as in elsewhere; and if we give an example of that: we are the number 1
arranger-finance for the UK companies through the bond markets; we were in the top three of
underwriters of rights issues to help recapitalise and expand UK companies last year; we are
number 1 or number 2 in helping the UK government sell its gilt issues when it uses syndicates;
we are number 1 or number 2 in that respect in helping the US government with its issuances to
finance deficit. So, these are the kind of things that GBM does; we are proud of the customer
focus that that represents. I leave it to you obviously to judge whether those are useful tasks or
not.




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Patrick Hosking – The Times
Thank you and just a secondary, if I may, on Ulster Bank: which looks like a can of worms, I
mean it is an extraordinary increase in bad debts there; are you having to allocate more capital to
that bank and do you see it as a core part of your business and has anyone lost their jobs as a
result of what looked like terrible lending decisions?




Philip Hampton – Royal Bank of Scotland
Well, the short answer is we are allocating more capital.




Bruce Van Saun – Royal Bank of Scotland
I’ll take that – part of the reason for the big loss in the fourth quarter, is we topped up our so-
called latent provisions which are somewhat anticipatory of problems so given the dire economy
in Ireland we wanted to get ahead of that. It is a fact that with these losses we have to infuse
capital into Ireland; it is a bank franchise, it still has a good market share and eventually Ireland
will recover so we do think it is worth backing it and the management team has taken some
actions on the things they can control in terms of rationalising their expense base and looking for
pricing opportunities on their products and so I think our profit before impairment loss shows
some signs of life and some signs of improving but, with the Ireland economy likely to be very
weak again in 2010, we will still suffer big credit losses.




Patrick Hosking – The Times
Thank you.




Patricia Kowsmann – Dow Jones Newswires
I can see here from the non-core impairment that the fourth quarter actually had an increase in
impairment on the property side – can you comment whether we should expect more impairments
in property factor going forward and especially comment on the commercial restage considering a
lot of analysts are as a potential problem for the bank. Thank you.




Bruce Van Saun – Royal Bank of Scotland
You know I think the property market certainly suffers from a lack of liquidity and we have
outsized exposures in the property portfolio particularly what we’ve moved to non-core and we



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are working with those borrowers to try and you know roll over loans where we can, where we
can get proper collateral, but we will be continuing to take some losses as we work down the
aggregate amount of those losses.




Rob Davies – Daily Mail
You talked about the extra strings that have been attached to loans, especially to small
businesses – does that include asking entrepreneurs to put up their own homes as collateral; if it
does it might be deterring some of them from making applications in the first place?




Stephen Hester – Royal Bank of Scotland
Well sometimes, I think the answer to that is yes. One of the important things I think one should
understand is that debt is not equity and every business must have some equity on which the
debt sits; and often the only form of equity that an entrepreneur has is the value that’s in their
house, so that would be a completely natural and normal thing to do. You know it is not our job to
supply equity other than if we are underwriting things in a rights issue; it’s our job to lend what we
can get back so it has always been part of small business lending. What we obviously try and do
is to lend to people we think can pay them back; the more dangerous the lending, the more
strings there will be attached and in a recession of course it is true that there are more
businesses with credit stress and for whom those strings are necessary. That is the case.




Rob Davies – Daily Mail
So that would effectively mean that more people are being asked to do that at the moment?




Stephen Hester – Royal Bank of Scotland
Well, I don’t think – again I don’t have a statistic but I certainly would believe that there will be
cases where house collateral is part of it; I am sure it is a small number but there certainly will be
those cases.




Rob Davies – Daily Mail
Okay, and then just to return very quickly to bonuses, you talk about the minimum necessary to
retain staff, and yet there is clear evidence to suggest that the initial figure you took to UKFI was
larger than the figure we have now arrived at on bonuses; so does that imply that you are now



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paying below the minimum necessary or that you were initially asking to pay more than the
minimum necessary?




Philip Hampton – Royal Bank of Scotland
Of course we have been involved with these discussions with UKFI for quite an extended period
of time; what we took to UKFI was originally, as I said, we needed their explicit legal consent for
that, so this is quite a detailed exercise; but we took to them where RBS might be positioned, top
quartile, lower quartile, whatever and that of course produces quite an extensive range and then
we ourselves because of the particular circumstances of the bank that we thought it was right that
we were positioned towards the lower end of the total range because we have been recapitalised
in a significant way and so on. It is also very important that we are not below the bottom of that
range otherwise we are clearly non-competitive and that is not a very sensible commercial
position to be. I don’t think for one second you could say that we hit the bull’s eye on that, and
we will never know for sure, but the judgement is that we have got ourselves into the right
position which is paying an appropriate amount, but close to the minimum necessary to sustain
the business and develop the business going forward. It is right therefore that in some of the
early conversations we had with UKFI, higher numbers were talked about but we were always
very clear that the right place to make the decision was here and UKFI eventually accepted the
arguments that we put forward. So, that is basically the process.




Rob Davies – Daily Mail
Thank you.




Steve Hawkes – The Sun
Just two quick things. First you talk about the people that caused the problems have left the
business; how many is that? Are you just talking about one in particular or did you round up
hundreds and ship them out of the country?




Stephen Hester – Royal Bank of Scotland
Steve, I am afraid I don’t have a number for you at my fingertips. I spend more time looking
forward than backwards. Basically the process that we went through which was most important
at the senior levels that happened in other places was to look at people who we felt most
accountable and who we felt a) as a result of that accountability but b) in terms of credibility going



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forward would not be the right foot taking us forward. So that did extend well below the top. And
given in a more positive context; which is the way I prefer to do it of the eight person Executive
Committee that sits in this room, not a single one of them two years ago was in the job they
currently hold. Half have joined us from the outside and half have been promoted internally. I
think that is a good mix, I am very pleased with that. In a more positive sense, I believe that we
now have a world class management team which we need to have, because we have a world
class task ahead of them.




Steve Hawkes – The Sun
Secondly on the bonuses; how fair is it in the context of what has happened to this country in the
past year that a group of traders can share 1.3 billion when so many other people are out of work
or face wage freezes?




Phillip Hampton - Royal Bank of Scotland
I have been struggling for fairness in remuneration issues my entire business career, so I haven't
quite cracked it yet probably. I mean I think if you look back at the total performance of the
Group, the starting position is wide paid bonuses but the Group overall is loss making. If you look
at the performance of GBM as an entity, its profit improvement year-on-year has been stunning.
It is set out there in the figures, it had a remarkable year, other investment banks did too, but
certainly our own business had an excellent performance.


The nub of the issue I think for a Board of Directors or a remuneration committee, management
whatever is what you need to do to make the business better and to keep the business strong.
However much you look back, the key decision is looking forward; and that is a judgement about
individuals, it is a judgement about teams, it is a judgement about business franchises. That is
why this is such a dilemma, the hard facts are a loss making business that has to be rescued by
taxpayers, takes you [in one] maybe business direction, certainly moral direction and the realities
of running the business take you to a different place. That is why it has been a difficult set of
discussions, both at with the Board, with UKFI and indeed in the public domain. It is not an easy
decision.




Steve Hawkes – The Sun
But just following that, Barclays last week were saying that net-net the systemic support to the
banking sector was actually negative for them, they claim because the extra cost of liquidity and




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the margin compression…I see you're smiling there. What would you say the GBM - you
mentioned some of the things GBM has done well in raising money for companies, helping the
government with guilds. Obviously both of those business activities have gone up because of the
situation we’re now in.




Phillip Hampton - Royal Bank of Scotland
I don’t know how you ever extricate one bit of performance from another. We did look at it; we
did make some overall judgements about government support and so on. but actually trying to
extract from a financial outcome from a level of profits or return on capital or whatever it is, the bit
that’s due to Central Bank intervention or whatever, is impossible. You can’t possibly do it. We
made some judgements about how big, how small or whatever, but I couldn’t pretend that it is
possible to make a precise judgement on those things. We took it into account.




Andrew Johnson – The Daily Express
Just going back to the bonus question, I mean out of the ₤1.3 billion, how much of that was cash
and how much of that was deferred shares? How happy do you think your investment bankers
are in accepting deferred shares as a bonus as opposed to hard cash? Have you looked to
increasing their base salaries, certainly Barclays has done that in its investment bank.




Stephen Hester – Royal Bank of Scotland
None of it was cash, it is all deferred and it has been subject of much publicity. It is deferred over
three years, but the first release date for some of it is June of this year when people can turn what
they receive into cash. The most highly paid investment bankers that we have have however
agreed to hold shares that they have received, or an element of the shares that they have
received for a full five years, regardless of the vesting. So that has happened at the most high
end. I think that shares as part of compensation is very important to align people’s interest with
the longer term and the institution with shareholders. I think that was a very sad missing element
of RBSs bonus payments before the crisis. So I think it is a very good thing that we have now
increased the proportion of shares that is in the package.




Andrew Johnson – The Daily Express
Barclays are giving ₤1.5 billion of their bonuses in cash aren’t they?




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Stephen Hester – Royal Bank of Scotland
That’s right. One of the ways in which RBS has, depending on your taste, led the way in
remuneration or been penalised, is the fact that no one above 39,000 is getting any cash. Now
as you said in Barclays a very huge sum of cash is being paid out now.




Andrew Johnson – The Daily Express
And salaries?




Stephen Hester – Royal Bank of Scotland
On the subject of salaries, obviously salaries are looked at all the time. We have not at this
juncture done a wholesale salary increase the like of which you comment some other banks. I do
however intend that over time salaries should be competitive in this Group. It is something, when
we’re clear about the market that we will return to.




Andrew Johnson – The Daily Express
And just a question on regulation; I was wondering if there is anything in the pipeline that kind of
gives you the heebie-jeebies. Obviously you're going to have to hold more capital; you're going
to have to have more liquidity. Are you confident you can reach that stage and still continue to
meet your lending commitments for example?




Stephen Hester – Royal Bank of Scotland
You can’t be confident about something you don’t know. By definition there can be uncertainties.
But generally as I said earlier on, we’re highly supportive of the direction of regulatory change.
We think that the, and issues being seriously talked about are sensible. We think there are very
very important questions of how quickly they should be brought in and exactly they are calibrated.
And certainly if they're brought too aggressively, too quickly it will have a negative impact on the
cost and availability of credit to the world economy, not just to the UK. Generally we’re
supportive; we’re trying to adjust our business mix to carry that extra capital. It will mean that
credit is more expensive, it will, and that is the price of a safer banking system.




Phillip Hampton - Royal Bank of Scotland



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Good I think we ought to wrap in a couple of more questions if I may.




Andrew MacAskill – Bloomberg
I was just wondering, Stephen you mentioned transparency many times today. Could you give us
a figure for your use of the special liquidity scheme and what the closure of that scheme means
for the business?




Stephen Hester – Royal Bank of Scotland
I am very happy to give it but I am told I am prohibited by the Bank of England from giving it. I
can say that we were not one of the major users of it. That is all I can say to you about it. We’re
in a very different position than some other banks, because the run-off of our Non-Core assets
means that we naturally do not have a need for that funding as and when it matures. We are
entirely supportive of the ending of the special liquidity scheme. We think the Bank of England
should no longer be supporting banks and banks can do it on their own steam, and so we have
no complaints about that or any worries about it.




Phil Aldrick – The Telegraph
I just wanted to get a number on the redundancy costs last year. Also you talked about there has
to be reform of bonus payments and you're leading the way. What would you like to see done to
get the other banks drawn into line with what you're doing? Do the G20 and FSA go far enough?
Obviously you're going a bit further.




Phillip Hampton - Royal Bank of Scotland
I think slowly but surely banks probably will start to come into line. When we did some of the
things we did on deferral and clawback in February of last year, we were pretty much on our own.
Now it is not the norm, it is extraordinarily widespread. There still is a huge international
challenge around this and it seems to me more that particularly the Americans flip-flop on this.
You had President Obama being very aggressive about it and then seemed to be more emollient
about it and so on. But in the end, I think what will happen is that the market will eventually start
to exert more of an influence. I don’t believe personally that that will be an easy or early process,
because some of the reasons for which investment banking in particular is long term profitable,
are quite deeply embedded. Scale of activity is one. Barriers to entry of course are very
substantial in this industry. But I think, we see it this morning, we see it this afternoon, we see it



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at other times, I think there will be shareholder pressure, there will be public pressure, there will
be political pressure and over time my view is it will change. I am not sure that here is an easy
mechanism for rapid material change. I think it will be a relatively slow process.




Question
[Off microphone]




Phillip Hampton - Royal Bank of Scotland
They will need to provide reasons for it. personally I they need to provide reasons beyond simply
moral outrage, and that is important, but I think they need to be business reasons, they need to
decide what…the question that Stephen was raising earlier about the role of banks and the
relationship between capital needs and soundness and liquidity and availability of credit in the
system is actually quite a difficult dilemma to work out.




Bruce Van Saun – Royal Bank of Scotland
I would say on the overall restructuring costs that are hitting our P&L, it has been about 1.3 for
two years running. That is the total cost of the massive restructuring that we’re undertaking as a
Group. There is lots of change management taking place and we have write off the facilities, we
have to wind down businesses and some of that embedded in there is some people costs. I
would say on the people side, Stephen mentioned there were 14,600 or some number like that of
people who have left the Group, only one of four of that number is a forced redundancy. So we
have had an ability to take advantage of voluntary turnover in terms of affecting some of that
headcount reduction.




Phillip Hampton - Royal Bank of Scotland
One more question if I may because I have been remiss anything over there.




Patrick Jenkins – Financial Times
I just had three very quick factual things. Firstly the GBM operating profit number of 5.7 billion, I
just wanted to be clear; does that include the Sempra profits and if so what is the impact going
forward? Secondly do you have a staff turnover ratio that you could give us so that we can
compare the impact of all the people you say have been leaving with rivals? Thirdly, on the



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insurance side of things, obviously slipped into loss quite badly in the fourth quarter; is that a one
off slip into loss? Do you expect quarter one 2010 already to be back in profit?




Stephen Hester – Royal Bank of Scotland
We don’t have a turnover ratio to give you. Sempra is out. Do you want to, Bruce talk about
insurance?




Bruce Van Saun – Royal Bank of Scotland
Just on Sempra, Sempra was moved to Non-Core, so that is not in the GBM figure.




Patrick Jenkins – Financial Times
Am I right in thinking it is about 240 million of profit.




Bruce Van Saun – Royal Bank of Scotland
There is a table in the announcement today, Appendix 4 which shows you the exact numbers on
that. It was a little over 200 million last year in 2009.


Insurance we had, clearly I mentioned the bodily injury reserving that we’re trying to get ahead of
that. That was really the reason that the operating profit dropped so much. It actually was a loss
in Q4. We have taken aggressive actions in terms of repricing roll over business, managing the
cost base down, tightening underwriting standards. So we think there is an opportunity to really
rebound in 2010, although probably that will stage throughout the year, quarter-by-quarter.




Patrick Jenkins – Financial Times
So you could still be loss making in the first quarter?




Bruce Van Saun – Royal Bank of Scotland
No I wouldn’t say that.




Phillip Hampton - Royal Bank of Scotland



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Anybody got an absolutely fantastic question or shall we go and have lunch instead? Stephen
before we go, do you want to say a few words.




Stephen Hester – Royal Bank of Scotland
Let me first of all thank you for bearing with us through this. And just really to remind you, we are
very clear, we have our three jobs. We have to serve customers well. We have to make the
bank safe. We have to increase shareholder value; which we can do by making the bank
commercially successful and that is the way we get the taxpayer the money back. We’re ahead
of schedule on our five year plan. We believe that we can reach our demanding targets. It won’t
be easy. There will be bumps and slips in the road, but at this stage of going forward, we believe
that we are beginning to be able to show why we were worth saving and we hope to make that a
positive experience for all in the end. Thank you very much for listening.




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