RBS faces tough questions over £12.5bn finances gap | Business | The Guardian
RBS faces tough questions over £12.5bn finances gap | Business | The Guardian: "RBS faces tough questions over £12.5bn finances gap"
RBS faces tough questions over £12.5bn finances gap
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- Tuesday February 5 2008
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The Royal Bank of Scotland is scrambling to reassure investors that it has a robust capital base in the face of increasing speculation that it needs to plug an estimated £12.5bn gap in its finances.
The Edinburgh-based bank is facing tough questions from City analysts and investors about whether it needs to conduct a rights issue or sell off assets to raise funds. There are also concerns that it might need to write off more losses from its exposure to financial instruments linked to the sub-prime mortgage crisis.
Some investors believe that if the bank did embark upon a cash call, it would require a shake-out of the RBS board and possibly the departure of chairman Sir Tom McKillop or chief executive Sir Fred Goodwin.
The lingering suspicion that the bank will need to raise capital is putting pressure on its share price, which has slumped to below 400p but started to recover yesterday as the bank briefed investors. Analysts have calculated that to put its capital base on a par with its European rivals, RBS would need to raise £12.5bn - just under a third of its existing market capitalisation.
Last week analysts at Credit Suisse and Citi raised the possibility of a rights issue by RBS. Citi's analysis also covered Barclays which it calculated could need to raise £6bn of capital.
The analysts at Credit Suisse said: "RBS shares continue to suffer from broader concerns over write-downs and loan impairment, magnified by the very high balance sheet leverage at the bank."
They raised six options for the bank, including doing nothing or selling assets such as rolling stock company Angel Trains.
They suggested it could sell its Bank of China stake or its insurance division, which includes Direct Line, or cut its dividend. They concluded, however, that a rights issue was the preferred route - even though it conceded the bank would be reluctant to proceed with such an embarrassing move.
A year ago, RBS raised its dividend by 25% and indicated that more generous payouts were on the way for investors. However, much has changed since then. The decision to buy parts of ABN Amro has put pressure on the bank's finances while the credit crunch has also added to its difficulties.
The analysts focus on the bank's so-called tier one ratio - a regulatory measure - which they argue is at 4%, which they compare with the European average of 6.5%, and note it is at the bottom of the range acceptable to the regulator, the Financial Services Authority.
However, RBS is thought to be arguing to investors that it has a total capital position of 12%, which is well above the regulatory norm of 8% and that this is a better measure.
RBS refused to comment but pointed to its last communication with the market when it insisted its capital was "within its target ranges".
400p
The Royal Bank of Scotland's share price has slumped to below this figure, though it is starting to recover
£6bn
The amount Barclays might be expected to raise, according to Citi
25%
The percentage by which RBS raised its dividend last year
posted by Mugenzi @ 5:25 pm
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