RBS chief Hester hits back over bonus row

Bank has become the poster child for what was wrong with banking industry before the financial crisis

Royal Bank of Scotland yesterday launched a concerted fightback against the mounting outrage over its decision to spend £785m on bonuses despite reporting a £2bn loss – almost double the previous year's figure.

Stephen Hester, the chief executive, insisted that the bank was "in a vastly better position" than when he arrived, and hit back at critics of its bonuses, describing the debate as "damaging". He also said it could hamper the bank's attempts to return the taxpayer's £45bn investment in the company, which has become the poster child for much of what was wrong with the industry in the run-up to the financial crisis.

"The noise around RBS is damaging to the prospect of achieving the goals everyone needs of it," Mr Hester said. "So far in the latest three years we have overcome that noise, and we will try to keep doing that, but no one should be under any illusions that you can't have your cake and eat it."

He was backed by UK Financial Investments (UKFI), the government body charged with overseeing the taxpayer's stake in the banking industry, while RBS's chairman, Sir Philip Hampton, wrote to shareholders saying the bank had to be run on "a commercial basis".

It said: "UKFI believes that the [RBS remuneration] committee has exercised reasonable judgement in relation to its approach to total variable remuneration this year, consistent with the need to protect the interests of shareholders, both in relation to the financial results and the retention of employees."

The bonus pool was split, with £390m going to investment bankers for 2011, a fall of 58 per cent from 2010. This still represented an average bonus of £22,900.

The rest of the money was distributed across the remainder of the bank.

Mr Hester and Sir Philip passed on payments of nearly £1m and £1.4m respectively. Other executives are not expected to follow suit.

RBS is cutting thousands of jobs at its Global Banking & Markets (GBM) division – the name for the investment bank. It delivered a £95m loss during the final quarter of the year, but was profitable overall, producing earnings of £1.6bn against £3.4bn a year earlier.

The bank said this was no worse than rivals and pointed out that competitors – such as Barclays Capital – were more generous with bonuses. But average staff costs were stable at about £144,000 each, and unions remain furious. The banking union Unite issued an angry statement, criticising the bank's pay offer to ordinary staff.

Mr Hester said "core operating profits" at the parts of the bank he wants to keep came in at £6.1bn. However, he warned that his original, five-year plan for turning round the bank would probably have to change – while RBS is ahead of targets the economy makes life tougher.

But he added: "We have reduced our balance sheet by £712bn, or roughly three times the national debt of Greece."

The results received a less than favourable reaction from the City.

Ian Gordon, a banking analyst at Investec, said: "Another shocker from RBS? A £2.0bn attributable loss vs consensus expectations of only £0.9bn with GBM and non-core doing much of the damage."

Mr Gordon cited concerns about "a continuing absence of profitability" from RBS and said it was hard to see the shares rallying in the short term.

The bank is aiming to sell off its Direct Line insurance business by floating it, which could take place towards the end of the year.