Banking sector's reputation has hit new lows, says RBS boss Stephen Hester

RBS is counting the cost of an IT meltdown and two mis-selling scandals (AFP/Getty Images)

RBS boss Stephen Hester conceded today that the banking sector's reputation had hit “new lows” as the taxpayer-backed lender counted the mounting cost of its failures.

The 80% state-owned bank set aside £310 million to deal with the fallout from an IT meltdown and two mis-selling scandals, while half-year losses doubled to £1.5 billion.

Unveiling the group's half-year results, Mr Hester admitted the banking industry was in "a chastening period" and warned there was "some way still to go" in mopping up mistakes made in the excessive years before the financial crisis.

But investors looked beyond headline figures and took cheer from an underlying performance in line with analysts' expectations, sending RBS shares 4% higher.

The bank said the computer glitch on June 19 that locked many RBS, NatWest and Ulster Bank customers out of their accounts would cost it £125 million.

But the lender warned that the full cost of the failure, which is being investigated by an external counsel, could rise and a further update would be given in the third quarter.

RBS unveiled a £135 million hit to cover the cost of payment protection insurance (PPI) mis-selling, bringing its total bill to £1.3 billion, while it took a £50 million charge to compensate small businesses that were mis-sold complex interest rate swaps.

But Mr Hester, who waived his 2012 bonus in the wake of the IT debacle, said RBS had "undergone huge change for the better" and added the "fruits of change are visible in many areas".

He said: "We have continued to make the bank safer and stronger as we clean up problems of the past. And despite the tougher economy, these results show our ongoing businesses to be more resilient than before with many further improvements under way."

Asked to comment on reports that some within government would like to see the bank fully nationalised, Mr Hester said "that is not a discussion we are part of".

Looking within the results, the group revealed a 14% slide in total income to £13.6 billion while its core banking operations saw a 19% drop in operating profits to £3.2 billion.

Staff costs were 4% lower in the period, RBS said, with employee numbers down by 5,700, driven by cuts in its markets and international banking arm.

The bank revealed a near-40% slide in its bad debt charges to £2.6 billion while total exposure to the troubled eurozone fell 8% to £218 billion.

The group said its plans to float insurance arm Direct Line on the stock exchange in the second half of this year remain on track.

Direct Line saw a 6% rise in operating profit to £219 million in the period, with significantly improved claims levels, despite the impact of more severe weather.

Ian Gordon, analyst at broker Investec, said: "While MPs and regulators focus their energies on sound-bites and gesture-politics, RBS management continues to make useful progress in terms of balance sheet repair."

The group said it had dismissed a number of employees for misconduct as a result of investigations into the fixing of Libor - the interbank lending rate at the heart of the most recent scandal to rock the banking industry.

The bank said it continued to co-operate with investigations but, like Lloyds Banking Group and HSBC before it, said it was not possible to measure the impact on the bank, including the timing and amount of fines or settlements.

The bank said gross mortgage lending in the first half of the year came to £7.7 billion, with net new lending of more than £3 billion.

Gross new lending to first-time buyers was up 26% while gross new lending to UK non-financial businesses totalled £41.5 billion, of which £19.2 billion was to small-business customers.

But campaigners at Move Your Money UK were unimpressed by the figures and called on customers to pull their cash out of RBS and put it into ethical alternatives, such as mutuals.

Spokesman Louis Brooke said: "RBS results show just how fundamentally flawed our current banking model is. The casino bank is losing more and more money, while they squeeze anything they can out of customers, irrespective of ethics or the law."

PA