[ by Howard Haykin ]

Stephen Hester, Chief Executive of the Royal Bank of Scotland, said on Wednesday that he will be leaving the bank.  The timing raises new questions about future plans to privatize the bank, which is 81%-owned by the British government. 

While news of the departure may be a surprise, it was certainly anything BUT A SURPRISE within the upper echelon of RBS.  It was the board's decision to jettison Mr. Hester, a former Credit Suisse banker.   RBS Chairman Philip Hampton offered this explanation during a conference call with reporters:

"The board had decided it needed a new chief executive to carry out the government’s pending share sale without questions being raised about how long he would stay in the job."  He added, "It’s a natural time for Stephen to leave.”

RBS had hoped to start reducing the taxpayers’ holding in the 2nd half of 2014.  Mr. Hester had navigated the bank through the financial crisis, and now the bank’s board hopes to appoint a new leader to oversee the privatization process that could take the rest of the decade to complete.

Stephen Hester Comments.   “This is a bruising, difficult job.  I have regrets about not completing the job.”  Mr. Hester will depart by the end of the year with a salary and pension package worth nearly $9 million.  

“I was prepared to carry on through the start of privatization,” Mr. Hester said. “This was the board’s decision, not mine, but I am comfortable with their decision.”

Since the beginning of the financial crisis, Mr. Hester has overseen a major restructuring of R.B.S., including shedding hundreds of billions of dollars of assets and shrinking its investment banking operations to a shadow of its former self.

The British bank also agreed to a $612 million settlement with American and British authorities earlier this year connected to the rate-rigging scandal.

Blemish on Hester's Legacy.   Despite Mr. Hester’s successful restructuring of R.B.S., the bank’s current share price remains 35% below the government’s so-called break-even point where politicians have said taxpayers would not lose money through a share sale.  The stock price of its local rival the Lloyds Banking Group, which also received a bailout, is hovering around the break-even price.

Analysts Chime In.   Analysts said that the starting gun on the firm’s privatization had now been fired.  Many investors would likely have raised questions about the executive team during the roadshow to sell the shares, and changing the firm’s chief executive now may help to assuage their fears.  Sanford C. Bernstein's Chirantan Barua:  “There are no more surprises left on the bank’s balance sheet.  Headhunters will find it much easier to find a candidate than when Stephen Hester was appointed."

For further details, go to:   [ Dealbook, 6/12/13 ].