City Republic: RBS could point the way to recovery - Brand Republic News - Brand Republic

City Republic: RBS could point the way to recovery - Brand Republic News - Brand Republic: "City Republic: RBS could point the way to recovery

City Republic: RBS could point the way to recovery

by Stephen Foster Brand Republic 25-Feb-08, 08:30

Is Royal Bank of Scotland about to 'seal' the market recovery, asks Stephen Foster. He also casts his eye over the automotive sector and reports of WPP's forthcoming results.

All eyes on Royal Bank of Scotland
Arguably the UK deal of the last decade or so was Royal Bank of Scotland's takeover of National Westminster Bank, creating a UK giant and now one of the biggest banks in the world.

The person who released the value in the deal was Fred "The Shred" Goodwin (now RBS CEO Sir Fred Goodwin) who found costs to cut that others had missed completely.

Fred has since expanded the business internationally, most notably with last year’s consortium takeover of Dutch giant ABN Amro, for a chunky £47bn.

RBS, which gazumped Barclays for ABN just as it had Bank of Scotland for Nat West, continued with its bid even while stock markets were collapsing and credit tightening thanks to the sub-prime crisis.

Some unkind commentators have remarked that it could have bought Merrill Lynch, JP Morgan and a couple of others for the same money at the tail end of last year. That is, they feel Fred overpaid.

Now there are fears that RBS will need to boost its capital ratio (the proportion of its own money to its loan book) if it has to announce big sub-prime write-offs when it announces its 2007 profits on Thursday.

But Fred didn't get where he is by blinking first.

A rights issue, the most obvious way of raising more capital, would result in a City chorus calling for Fred's head (RBS shares are already down 40% or so in a year and a rights issues would depress them further).

So RBS is far more likely to flog off a few of the big assets it has acquired over the past few years, like Angel Trains and Condor Ferries.

A few weeks ago it looked as though it might be adding Liverpool Football Club to this eclectic list, because it lent Tom Hicks and George Gillett the money to buy it. However, they've since re-financed.

But, just as football managers need to be lucky, embattled CEOs need circumstances in their favour too.

And there are signs that the markets are recovering a bit, in the UK anyway. The financial sector has brought them down but Barclays and Lloyds TSB produced decent figures last week and Alliance & Leicester, which took a biggish hit on sub-prime, didn't collapse and will probably be taken over anyway. Northern Rock is out of the way (for better or worse) and RBS, unless it's just talking a good game, could seal the recovery.

And Fred's big bet on ABN Amro won't look so daft after all.

The spread betting shops are expecting the FTSE 100 to rise back above 6,000 this week and the index duly set off north in early trading this morning.