Royal Bank of Scotland admitted today that it will have to ask shareholders for an extra £12bn to bolster its balance sheet, after being forced to write down nearly £6bn on its dodgy investments. The acquisition of ABN Amro last year left RBS running dangerously low on readies – and with the FSA putting pressure on banks to boost their capital ratios (the amount of cash they have in the bank relative to the amount of risk they’re taking), it’s been forced to ask shareholders to make up the shortfall (it was either that, or hang on for on a lottery rollover).
The rights issue means existing shareholders will be offered 11 extra shares for every 18 they already own, at the heavily discounted price of 200p each (that’s 46% below yesterday’s closing price). Assuming they take up the offer, they'll be left with the same proportion of the stock they currently hold - although of course, they have to shell out extra cash for the privilege. So it’s going to be an expensive business for shareholders - but at least they’ll be to maintain their existing stakes rather than seeing some opaque sovereign wealth fund snap up a big chunk of the business on the cheap.
The move represents a serious climb-down for RBS boss Sir Fred Goodwin, who’s been insisting for months that the bank didn’t need any extra capital. Today Goodwin and his chairman Sir Tom McKillup were paying the ‘times have changed very quickly’ card, highlighting the ‘severe and increasing deterioration in credit market conditions’ during March. Either way they’ve clearly been left with a big hole, which even a rights issue might not be enough to fill – they suggested today they might also have to flog their insurance businesses (including Churchill and Direct Line), following their previous failure to offload rolling stock company Angel Trains.
But if RBS is feeling the pain, it certainly isn’t the only one – JP Morgan reckons that the UK’s four biggest banks (RBS, HBOS, Barclays and Lloyds TSB) have a combined capital shortfall of about £37bn. ‘Lack of capital in the UK banks is a systemic issue, not only a RBS-specific one,’ its analysts have warned. So it seems almost inevitable that others will end up having to follow suit and appeal to shareholders. Chancellor Alistair Darling and Bank of England governor Mervyn King certainly seem to think so, judging by their comments today.
So the next few months will probably be an expensive time to be a shareholder in the financial services sector. On the other hand, lots of market observers think banking stocks have now dropped so far that they’ve started looking cheap – so they could have the last laugh in the long run...