By Matt Scuffham and Chris Vellacott
LONDON (Reuters) - Royal Bank of Scotland
Hester's departure, engineered by chairman Philip Hampton with the backing of Britain's finance ministry, presents RBS with the near-impossible task of finding an ideal candidate - an experienced banker untainted by the industry's scandals who has the skill to deal with its biggest shareholder, the government.
Political and banking sources say that while Hampton took the initiative in removing Hester, he could not have done so without the support of finance minister George Osborne.
Britain holds a controlling 81 percent stake in RBS after pumping 45.5 billion pounds ($71 billion) in to keep it afloat during the 2008 financial crisis.
Matthew Beesley, head of global equities at Henderson, an investor in RBS, said Hester's departure "clearly shows the hand of the government in the management of the bank".
"It also shows very emphatically that shareholders - what few of them there are (government aside) - don't like it. The sooner the bank is fully returned to the private sector, the better," he said, pointing to a sharp drop in RBS shares after Wednesday's announcement that Hester would go later this year.
During his five years at the helm, Hester oversaw a massive shrinking of the RBS balance sheet, all the while parrying criticism from politicians about the strategy and the size of his bonuses.
A former investment banker, his wealth and penchant for fox hunting made him a target for anti-banker sentiment.
"Who wants that sort of visibility? And if remuneration is going to be a big part of it, I think they're going to struggle to get the person they want," said another RBS investor, who asked not to be named.
Hester, whose basic pay package was worth 1.6 million pounds ($2.5 million) a year, has opted to forgo his annual bonus in three out of the last four years, recognizing public resentment over the awards.
Within the banking industry, Hester is respected for his success in shedding around 900 billion pounds' worth of assets from the bloated balance sheet of what was once the largest bank in the world.
But that enthusiasm is not always shared by politicians and Hester has faced calls to accelerate the bank's restructuring.
In February, he reluctantly bowed to political and regulatory pressure to cut the size of RBS's already shrunken investment bank and sell off a stake in its U.S. business, Citizens.
RBS's shares price continues to lag the 407 pence level which the government considers its break-even. The shares topped the FTSE-100 fallers on Thursday, losing 3.3 percent to 315 pence, having earlier been down 8 percent. Taxpayers are currently sitting on a loss of around 10 billion pounds.
Despite Hampton's insistence on Wednesday that RBS will be ready for privatization by the end of next year, industry and political sources say the government is more likely to sell first its shares in Lloyds Banking Group
Osborne is expected to address the future of RBS in his annual Mansion House speech to financiers in the City of London next Tuesday.
Before then a report from a committee of lawmakers is expected to put forward proposals for a break-up of the bank.
INTERNAL AND EXTERNAL CANDIDATES
RBS indicated that it will consider internal and external candidates for the chief executive role.
External candidates touted by industry sources and analysts include Richard Meddings, finance director at Standard Chartered
Internal options would include finance director Bruce Van Saun, who is scheduled to move to a new role running Citizens from October and preparing it for a stock market flotation. The bank could also consider Nathan Bostock, currently head of restructuring and risk and a former Abbey National finance chief, who is due to succeed Van Saun as finance director.
Bostock and Van Saun, an American who has been finance director since 2009, have both played critical roles in the restructuring of the bank
With limited options available, however, Hampton could select a candidate from outside banking. A possibility could be Justin King, who has rejuvenated retailer Sainsbury
There have been rumors King is ready for a new challenge and he was recently linked with the job of running Formula 1 motor racing. He could not be reached for comment.
Speaking on Bloomberg TV, Hampton sidestepped questions on how long he would stay as RBS chairman, raising the possibility he could also go when Hester's successor is appointed.
"Chairmen normally do 5, 6 or 7 years, that's the normal lifespan," said Hampton, who has been in post for four and a half years. "We will want to have stability and continuity given we are changing CEO and when we have a new CEO in place then other aspects of board succession will be addressed."
(Additional reporting by Steve Slater, Clare Hutchison and William James; Editing by Carmel Crimmins and David Stamp)