RBS plans rights issue to strengthen capital reserves

21 April 2008 / by Joy Tibbs
The Royal Bank of Scotland has confirmed it is considering appealing to shareholders in order to boost its capital holdings.

As yet, it has not yet disclosed how much its planned rights issue will involve, but an announcement is likely to be made tomorrow, just one day ahead of the bank's financial results report.

Although experts estimated that the rights issue would raise between £5 billion and £12 billion, the bank has implied that the value will be no more than £10 billion. This could make it the biggest rights issue in UK banking history. According to reports, RBS – the UK's second largest bank – may aim for a core Tier One equity ratio of more than six per cent, which would actually place it among the better-capitalised financial institutions in the UK.

Furthermore, in response to shareholder complaints about chief executive Sir Fred Goodwin and chairman Sir Tom McKillop, RBS is set to add new members to its company board of directors. Many connected to the company believe early measures could have been taken to safeguard the bank's position, for example selling underperforming subsidiaries. However, experts believe the bank will announce the sale of its Angel Trains subsidiary tomorrow.

RBS is expected to announce write-downs of as much as £6 billion on Wednesday. It came under pressure after leading a €71 billion takeover of Dutch bank Amro last year and, like many other companies, has struggled to maintain previous performance levels as the credit crisis has worsened.

It is thought that other banks may also consider pursuing rights issues to shore up capital reserves. There is increasing speculation that Bradford and Bingley is concerned about the strength of its balance sheet. The bank's annual meeting will take place tomorrow, at which concerns about its capital reserves are likely to be raised.

It is possible that Bradford and Bingley may also consider a cash call in the near future, as may Alliance & Leicester and HBOS. However, should RBS' bid to shareholders succeed, it may become more difficult for other institutions to follow suit as investors tire of putting their hands in their pockets to bail out the big banks.

Meanwhile, Swiss bank UBS continues to struggle. Despite being the largest wealth manager in the world, the bank has suffered severe losses since the sub-prime mortgage debacle began last year. It has already reported asset write-downs of £37 billion and has had to appeal to investors for emergency funding on two occasions.

©Fair Investment Company Ltd