RBS in record-breaking £12bn cash call

Leading shareholder fires warning shot over chief executive's bow as UK's second biggest bank bids to shore up its finances

Royal Bank of Scotland will today urge its shareholders to support a record-breaking £12bn cash call aimed at strengthening its capital position, weakened by a £5.9bn writedown on instruments related to the credit crunch.

The UK's second biggest bank is also putting its insurance business, which includes Churchill and Direct Line, on the block in an attempt to raise extra funds to bolster its balance sheet. Up to £4bn could be raised through the sale. To conserve capital, the bank is also reducing activity in parts of its global banking and markets operation.

Sir Fred Goodwin, the chief executive, insisted the bank was "doing the right thing in my judgement". Goodwin has been under fire from investors for launching the rights issue after telling them as recently as last month that such a fundraising would not be necessary. This was despite the bank's finances having come under further pressure from the record-breaking takeover of ABN Amro at the end of last year.

Goodwin and the RBS chairman, Sir Tom McKillop, will today start meeting shareholders and will have to work hard to win investors' support. One leading shareholder this morning fired a warning shot over Goodwin's bow and made it clear that changes must be made.

Standard Life Investment's head of UK equities, David Cumming, said the rights issue "deals with concerns over the balance sheet" and that Goodwin "justifies continued support".

But, he added: "He has to fully engage with his shareholder base and a strengthened non-executive board to maintain that support."

Goodwin said today that the "world had changed" in recent weeks. In March – when US investment bank Bear Stearns was rescued by the US Federal Reserve – credit conditions had deteriorated forcing the bank to make fresh writedowns on instruments affected by the sub-prime mortgage crisis in the US of £5.9bn.

He acknowledged he had been under pressure in recent weeks and asked if he was considering his position, he said: "There are more important issues."

"We have made the announcement this morning and are going to be going out and talking to our shareholders. I can well understand that this is not an easy time for shareholders. I am a shareholder too," he said, as the bank expressed "regret" for the demand placed on investors to support the biggest rights issue to ever take place on the London stock market.

The rights issue will be at a discount of 46.3% to the closing share price of 372.5p on April 21 and be made on the basis of 11 new shares for every existing 18 shares at 200p.

Shares in RBS closed down 3.9% at 358p. Barclays and HBOS, which are expected to launch their own cash calls, suffered 3.7% falls with Barclays closing at 461p, and HBOS, which owns the Halifax, ending the day at 520p.

McKillop defended the takeover of ABN which was snatched from rival Barclays in a consortium that included RBS, Santander of Spain and Dutch-Belgian bank Fortis.

McKillop said advisers had taken soundings of shareholder's views about supporting the rights issue. "We don't really have serious concerns there won't be support," McKillop said. In addition to meeting City investors today, the bank faces its private investors at its annual meeting in Edinburgh tomorrow. In an attempt to head off a revolt, the bank intends to appoint three new non-executives to strengthen its board although McKillop insisted the current board was "very strong".

The rights issue is needed to "reposition" the capital base of RBS which has always been run on a much thinner capital cushion than any of its rivals. Goodwin acknowledged he had been proponent of this plan and admitted it was not an easy decision to change the strategy. "I was an advocate for the capital base and the metrics we used before - I acknowledge that. But given the change we have seen in the world, it's just the right thing to do - I am absolutely convinced about that," he said.

Analysts at Merrill Lynch have calculated that in the past 15 years RBS's tier-one ratio used to measure regulatory capital has been above 5% only once in 1999, when the bank raised equity to help fund the aborted acquisition of Birmingham Midshires building society. The bank today said it was now aiming to boost the core tier 1 ratio to 6% from 4.5% at the end of December.

The bank insisted that there had been no pressure from regulators on RBS specifically to bolster the capital base at a time when regulators around the world have called on banks to put more capital aside. McKillop and that the decision had been taken by the board concerned that the current economic client was changing and acknowledged the decision to run the bank with a bigger capital cushion was "a change in mind set". Goodwin said there had been a "palpable sense" from investors that the bank should raise fresh funds.

The £5.9bn of writedowns – or £4.3bn net of tax – were based on "prudent assumptions" reflecting a "further sharp deterioration in market conditions and outlook in credit markets at this point".

The bank acknowledged that its dividend – hiked 25% in 2006 and 10% in 2007 – would reduce in 2008 when it admitted it would need to take the usual step of paying the interim dividend in shares, rather than cash, to conserve capital.

Goodwin insisted there would no "fire sales". The insurance arm could be sold off in its entirely, but a stake sale might also be considered. Angel Trains, the rolling stock company, is already up for sale but he ruled out the sale of a 5% stake in Bank of China.

Current trading was "satisfactory" the bank said, with a slowdown in the investment bank arm.


Jill Treanor

The GuardianTramp

Related Content

RBS chief tries to hold on to his seat while performing cash-call U-turn

Shareholders expected to put pressure on Sir Fred Godwin following shock £5.9bn write-down

Jill Treanor

22, Apr, 2008 @11:26 PM

Royal Bank of Scotland backtracks on claim that captial ratio within usual range

Royal bank of Scotland backtracks on claim that capital ratio would be rebuilt without raising additional funds

Jill Treanor

22, Apr, 2008 @11:11 PM

Article image
RBS chairman rocked by stinging attack over £12bn cash call

Sir Fred Goodwin says cash call is 'the right decision' as his chairman comes under fire

Jill Treanor

23, Apr, 2008 @4:30 PM

Article image
RBS makes record-breaking cash call
Race to get support for £12bn rights issue

23, Apr, 2008 @9:19 AM

Article image
UK banks and insurers blacklist cluster bomb manufacturers
Lloyds and Aviva among the major firms invoking 'stop lists' to purge cluster munitions companies from their share portfolios

Severin Carrell, Scotland correspondent

09, Apr, 2012 @5:00 PM

Article image
Banks: HBOS under pressure after RBS's record-breaking cash call

HBOS shares fell further towards its rights issue price on the day Royal Bank of Scotland announced the successful completion of its own £12bn cash call

Jill Treanor

09, Jun, 2008 @6:58 AM

HBOS cash call gets sceptical response

Investors to get dividend payout in shares as bank makes £4bn rights issue designed to prepare for four years of market turmoil

Jill Treanor

30, Apr, 2008 @7:26 AM

Viewpoint: When the music stops it is time to leave the dancefloor

Nils Pratley: Heads should roll at RBS following yesterday's write-down of £5.9bn

Nils Pratley

22, Apr, 2008 @11:11 PM

Article image
Darling in talks with banks as RBS tops list of stockmarket casualties

Increase in limit of savings protection on agenda after chancellor's speech to MPs disappoints markets

Jill Treanor

06, Oct, 2008 @11:01 PM

Lloyds TSB takes over HBOS for £12bn

On day of frenetic activity and unfolding drama, takeover fails to halt deepening crisis in world's markets

Larry Elliott and Jill Treanor Andrew Clark in New York

17, Sep, 2008 @11:01 PM