More bonus strife for zombie banks

Britain's big two zombie banks are expected to report another year of huge losses when they reveal their full-year results this week, igniting a fresh storm over bonuses.

Analysts expect Royal Bank of Scotland (RBS) - which reports on Friday - to unveil pre-tax losses of £5.1 billion ($11.2 billion) for 2009, against £8.3 billion the previous year.

But the bank is still preparing to pay as much as £1.5 billion in bonuses to its investment bankers, in a move likely to generate fresh controversy despite the decision by Stephen Hester, the chief executive of RBS, to waive his £1.6 million bonus for 2009.

RBS has long argued the payments are essential for it to "maintain top-quality staff" and to help to pay back the taxpayers' multibillion-pound investment in the company.

The bonus package had to be agreed to by UK Financial Investment, the Government body set up to oversee the taxpayer's investment in the banking industry. Payments will be in shares, rather than cash.

The decision by Hester to waive his bonus is set to pile pressure on Eric Daniels, the chief executive of Lloyds Banking Group, to follow suit.

Lloyds will report a small profit, largely thanks to accounting quirks. However, its "underlying" loss could come in at as much as £13 billion.

Lloyds said the question of Daniels' bonus was "a matter for our remuneration committee".

The pressure on the chiefs of the Government-backed banks to defer, or waive, their bonuses has been mounting ever since Barclays chief executive John Varley and president Bob Diamond last week turned down their bonuses for the second year running.

That was despite the bank reporting record profits of £11.6 billion.

Barclays has benefited from Government measures to stimulate the economy and protect the banking system, but has not received any direct funding from the taxpayer. During the height of the financial crisis it raised cash from the Middle East.

On Saturday, Keith Skeoch, who heads Standard Life Investments, a Lloyds shareholder, hinted in an interview with the BBC that Daniels should not receive a bonus. He said: "As far as I'm concerned, I think there is a distinction between somebody who comes on board to achieve a turnaround, and an institution that went cap-in-hand to the market."

That suggests he believes that Hester is in a different category to Daniels, because he was brought in to lead a recovery after the bailout of RBS.

Hester's package could reach £10 million if he meets targets, and he admitted at a hearing of the Treasury select committee that even his parents thought he was paid too much.

Some 41 per cent of Lloyds shares are held by the taxpayer, while the state's interest in RBS is 84 per cent.

Despite this, RBS recently refused to release to "indirect shareholders" details of a shareholder letter on its pay policy.

Both banks are also coming under pressure over their policies on lending to businesses, amid continuing controversy about whether banks are doing enough to aid a revival.

Business groups including the Federation of Small Businesses and the Institute of Directors have sharply criticised the banking industry for not doing enough, despite claims from banks that they are making finance available to support smaller firms and fuelling an economic recovery.

- INDEPENDENT