[ by Howard Haykin ]

Royal Bank of Scotland, which has been taken for dead in some financial circles, has started 2012 with a bang, reporting improved earnings for the first quarter and saying that it was close to repaying all its government-backed emergency loans.

RBS's 2007 Disastrous Acquisition of ABN Amro. The profit report is truly wonderful and deserving news for RBS CEO Stephen Hester and his team, who have worked very hard to recover from a series of financial obstacles.

First, Royal Bank of Scotland has for years struggled under the weight of a massive 2007 acquistion.  After winning a massive bidding war to acquire ABN Amro in 2007, RBS and the other banks in the consortium struggled to cut costs and generate enough revenues to justify their new acquisition.  As if that wasn't devastating enough, along came the global credit crisis that began around 2007.  Ultimately, RBS required massive bailouts from the U.K. government, which ended up with an 84% stake in the business.

Mr. Hester's Achievements. Second, the profits generated by CEO Hester is vindication for his efforts to turn the company around.  Obviously, Mr. Hester succeeded - but not before he was "flogged and pilloried" earlier this year when the company presented him with a financial bonus for 2011.  In response to the media and public opinion, which  unanimously renounced the payout - which in no way was obscene, like some of the payouts to U.S. CEOs - Mr. Hester chose not to take the bonus.  Well, as C-I reported, he was deserving of it.

"We are happy with progress in the first quarter, though the economic and regulatory backdrop remains tough," CEO Stephen Hester said in a statement.  "Next week the bank will repay the last of the U.K. government-backed funding support we received during the crisis."

Mr. Hester has improved the bank’s capital and scaled back riskier assets.  He cut jobs and costs and shrank its investment banking operation.  The bank is also selling branches and assets, including its insurance business Direct Line, which it is preparing for an initial public offering.

In early morning trading in London, shares in the British bank rose 1.5%.

The British government continues to own more than 80% of Royal Bank of Scotland, but is seeking to sell the stake as soon as possible for a profit.  The share price remains well below the level it was in 2008 during the banking bailout, under which the bank received £75 billion in emergency financing.

Including a £2.5 billion accounting charge on the value of the bank’s own credit, Royal Bank of Scotland had a net loss of £1.5 billion in the first quarter compared with a loss of £528 million in the first quarter of last year.  [Dealbook, 5/4/12]