RBS seeks share redemption

"The proposed rights issue will raise proceeds of £12.0-billion, net of expenses," Britain's second-biggest bank said in a statement announcing the country's largest-ever issuing of new stock.

A rights issue gives current shareholders the opportunity to buy new shares in a company, often at a big discount, in order to boost capital reserves.

The news came one day after the Bank of England announced a massive credit-crunch package, worth nearly $100-billion, aimed at getting British banks lending again.

RBS said on Tuesday that it would have to make further asset writedowns of £4.3-billion, or £5.9-billion before tax, arising this year from the credit crisis and resulting turbulence on financial markets.

Strains from the global squeeze on credit had cost it £2.5-billion last year, RBS had revealed in February, when it also told shareholders that a rights issue would not be necessary.

"In the light of developments during March, including the severe and increasing deterioration in credit market conditions, the worsening economic outlook and the increased likelihood that credit markets could remain difficult for some time, the board has concluded that it is now appropriate for RBS to accelerate its plans to increase its capital ratios," it said.

Many leading global banks have suffered heavy losses connected to the unravelling of the collapsed US subprime or high-risk housing sector, and the subsequent credit crunch that tightened up lending criteria.

Capital reserves at RBS have also been depleted by its leading role in last year's European consortium takeover of Dutch banking giant ABN Amro for $100-billion, the biggest ever bank acquisition in the world. The other consortium partners were Belgian-Dutch Fortis and Spain's Banco Santander.

RBS Chairperson Tom McKillop played down speculation that shareholders could now force out chief executive Fred Goodwin, but acknowledged that the purchase of ABN Amro had been mistimed.

"The board unanimously believes that the executive team has all the ability it needs to steer the bank through these tricky waters," McKillop told reporters.

Regarding ABN Amro, he added: "Relative to valuations today, we paid a very high price. We also increased our exposure to wholesale markets at what turned out to be an unfortunate time."

The new RBS stock would be sold at 46.3 percent below Monday's closing share price of 372.5 pence, while shareholders will vote to approve the measure in May.

The issue would be made on the basis of 11 new shares for 18 shares held at a price of 200 pence per share.

In early morning trade on Tuesday, RBS shares sank 2.08 percent to 364.75 pence on London's FTSE 100 index, which in turn fell 0.14 percent to 6044.60 points.

The bank, which is based in Scotland, said that it would sell some non-strategic assets including all or part of its insurance activities to raise a further amount of €4.0-billion after tax by the end of the year.

The measures were intended to raise the ratio of so-called "core tier one" shareholders' funds to more than 6.0 percent from 4.0 percent. This is a key measure of capitalisation relative to loan risk in the banking sector.

"It should be noted that the capital raised in the rights issue is not expected to generate the same return as existing capital in the business," the statement continued.

"This effect alone is likely to result in a reduction in dividend per share in 2008, after taking into account an adjustment in respect of the bonus element of the rights issue."

The Bank of England, Britain's central bank, had announced on Monday that it would allow high street banks to swap mortgage-backed securities for government bonds in a bid to boost their liquidity amid the credit squeeze.

BoE governor Mervyn King had said the measures could eventually reach double the initial amount of £50-billion, telling reporters the plan has "no arbitrary limit on it."

AFP