Royal Bank of Scotland Needs $23.9 Billion

The Royal Bank of Scotland needs to raise $23.9 billion to cover its loan losses after announcing an additional $11.7 billion in bad debt. It is expecting further write downs. So, it is asking its shareholders for money. It will offer them 11 new shares for every 18 they have at 200 pence each, the largest rights issue in Europe these days. Yesterday, it traded at 360.25 pence, quite a discount is on offer.

Sir Fred Goodwin, CEO of RBS (who is under pressure to get out), is adamant that the financial regulators aren’t forcing this on the bank. “This is very much the board’s decision. It represents a shift in strategy as historically the bank has been run with a very efficient balance sheet.” He added, “The world has changed and when the world changes you have to revisit all the bases of your assumptions.”

Sir Fred bears the responsibility for the ABN AMRO purchase last summer. Sir Tom McKillop, the RBS chairman, is also on the hook, and he said that RBS paid too much for the Dutch bank, “Relative to bank valuations today, one would say it was a very high price . . . . We increased our exposure to wholesale markets at what has turned out to be an unfortunate time.”

The two have a certain credibility problem that extends beyond ABN AMRO. They boosted the dividend that the bank pays by 10% recently. When they did so, they claimed that there was no need to enhance the balance sheet. Yesterday, they announced that the dividend for the quarter would be paid in shares rather than in cash, not a good sign

Further strengthening is going to be necessary, and RBS is selling off its insurance business to put some more cash (as much as £5 billion) in its pockets. It also plans to sell Angel Trains, its UK train leasing subsidiary, to Babcock & Brown and Deutsche Bank for £3.5 billion. Will it be enough, though? Or are they further nasty surprises?

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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