Incoming Royal Bank of Scotland chief Stephen Hester yesterday signalled its future focus will be on traditional banking with an end to massive profit generation from trading its own funds.

But it remains unclear whether a controversial government demand that banks that accept its help return lending to last year's levels will have any impact after Royal Bank insisted it already exceeded that threshold.

Hester, currently chief executive of British Land who joined the Royal Bank board as a non-executive in August, will take over from Sir Fred Goodwin before the end of the year as the company absorbs a fresh £20bn capital injection.

He said: "We will make material changes to the strategy. We do need to do that in light of where the world is and in light of where we are in terms of the capital we have raised. That will mean rebalancing our business towards our very strong customer franchises."

One shareholder told The Herald this meant the company would use its capital to lend to clients rather than trying to make a profit by investing it itself, an approach that has led to £5.9bn of writedowns this year as the credit crunch hit.

Hester, chief operating officer at Abbey until November 2004 after a career at investment bank Credit Suisse First Boston, indicated that Royal Bank would retain an international focus. Its interests range from Citizens Bank in the US to a stake in Bank of China. "I believe that RBS, when we come out of this strategy, will be a strong international bank," Hester said.

In November the 281 year-old bank, which raised £12bn from investors in June, will ask them to pump in another £15bn in return for ordinary shares. The government will also buy £5bn of preference shares paying interest of 12%.

If, as expected, shareholders shun the issue, the bank could end up 60% owned by the state which is setting up a company to manage its new banking investments. It will sell down its stake over time.

But there is still controversy over the influence the state will have.

Hester, appointed deputy chairman of state-owned Northern Rock in February, maintained the government understood the institution's need to take a "hard-headed commercial approach".

But the state will have a veto over the appointment of up to three members to the Royal Bank board, although these will not be government officials.

More contentiously, it has demanded that Royal Bank, like the combined HBOS-Lloyds TSB which is also seeking state backing, "(maintain) over the next three years, the availability and active marketing of competitively-priced lending to homeowners and to small businesses at 2007 levels".

Ken Murray, founder of financials fund manager Blue Planet, said that given rising bad debts "such an act would be an act of gross ignorance and complete irresponsibility with taxpayers' money".

The Treasury indicated that the definition of 2007 levels was up to the banks themselves to determine.

But Hester played it down: "The commitments we are making as it relates to mortgages and (small and medium sized companies) are as we would be doing anyway."

Royal Bank said yesterday that its lending in the first half of 2008 was higher than in 2007.

Chairman Sir Tom McKillop added: "If there is a problem, it is the lack of demand for mortgages at what is realistic pricing."