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The Deal: RBS Confirms Retail Bank Chief as New CEO

NEW YORK ( The Deal) -- Royal Bank of Scotland (RBS - Get Report) confirmed Friday, Aug. 2, that it had appointed the New Zealand head of its retail banking unit as its new CEO, holding an olive branch to the Edinburgh institution's Westminster overlords as they consider whether to split the bank in two.

Ross McEwan, 56, will replace Stephen Hester, 52, on Oct. 1, Royal Bank announced as it posted first-half results. These showed that overall operating profit rose 5% year-on-year to £1.68 billion ($2.55 billion), in line with forecasts, but declined at the bank's core business.

McEwan will take the helm after Hester was effectively forced out by the U.K. government, which holds about 82% of the bank after rescue funding worth £45.5 billion dispensed at the height of the credit crisis.

The appointment of a retail banker meshes well with the government's desire to refashion the once-thrusting global institution into a dramatically scaled-back consumer and business lender. It comes as the government, aided by advisers Rothschild, Slaughter and May and BlackRock Solutions, weighs whether to split Royal Bank into a "good" and "bad" bank to help boost its lending. P/>Chancellor of the Exchequer George Osborne agreed to the review following a recommendation by a committee of parliamentarians charged with vetting Britain's financial sector. High-profile figures such as former Bank of England Governor Mervyn King had also argued in favor of the split, even though this would inevitably delay the government's long-awaited sell-down of its majority stake. P/>Investec analyst Ian Gordon was among many observers to criticize Hester's forced resignation in June and opposes the notion of the" bad" bank split--a move Hester had previously argued was pointless since he hived off Royal bank's "noncore" business into a separate division back in February 2009 and spent the past four years slashing risky assets.

Gordon Friday welcomed McEwan's appointment. "We believe the importance extends well beyond Ross' own personal credentials. It should signify a degree of strategic continuity and (we hope) help to head off the threat of fresh Government-initiated value-destruction," the analyst noted.

However, although the choice of a retail banking specialist may please regulators, others pointed out McEwan's lack of regulatory and political connections. Before arriving in the U.K. to head Royal Bank's retail bank in September 2012 McEwan led retail banking services at Commonwealth Bank of Australia Ltd. for five years.

His entire career before Commonwealth Bank was spent in Australia and New Zealand, where he held various roles in the insurance and investment industries from the mid-1980s.

Hester told a conference call Friday that he'd appointed McEwan as retail banking chief last year because of a customer service turnaround he'd achieved at Commonwealth Bank.

"What Ross had done was take one of the major banks in Australia and move it really clearly forward in customer service and therefore customer rankings while making profit out of it," he said. "I was impressed with his detailed operational skills and customer-focused skills. He also has a personality that will do the human things of leadership that will need to be done well."

"I promised him an adventure; he was a little unsure," added Hester. "He will now get a bigger adventure than he bargained for."

Royal Bank of Scotland is preparing to hold an IPO for a minority stake in Providence, R.I.-based RBS Citizens Financial Group. in early 2014, a move Hester had initially resisted. First-half operating profit at Citizens, which Royal Bank has been restructuring to improve returns on equity, rose £32 million to £363 million. Operating profit at Royal Bank's markets unit, which the lender is paring back to focus on fixed income, was down by about two thirds to £371 million.

Royal Bank's core group operating profit fell 17% to £2.46 billion.

Royal Bank shares were down 4.6% at 318.2 pence by late morning in London as its results drew unfavorable comparisons with those of bailed-out peer Lloyds Banking Group plc, whose strong first-half results Thursday stoked expectations the state could start selling down its 40% holding as early as this month.

--Written by Laura Board

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