(Corrects para 14 to show HBOS is subject of rights issue speculation, not
HSBC)
LONDON (Thomson Financial) - Royal Bank of Scotland Group PLC, the UK's
second-biggest bank, is preparing a rights issue to replenish its capital
reserves, a source familiar with the situation said.
The source did not say how much RBS would seek to raise, but analysts have
speculated the bank might look for up to 12 billion pounds in an effort to
restore its capital ratios to the European average.
An announcement could come as soon as Wednesday, when the bank is expected
to issue a trading update ahead of its annual general meeting.
In a brief statement, RBS said it "notes recent speculation about a possible
rights issue", and confirmed that it will provide an update on its recent
trading and capital position next week. The bank declined to comment further.
There has been speculation for several months that RBS would tap the market
to restore its capital strength, eroded by its acquisition of parts of Dutch
rival ABN Amro last year, and 1.6 billion pounds in write-downs resulting from
the credit crunch.
However, a rights issue will be seen as a strategic volte-face for the
group, which has previously said that it did not need any fresh injection of
capital. In February, RBS chairman Sir Tom McKillop told the bank's biggest
shareholders that no rights issue was planned.
"RBS mounted a robust defence of their capital base and of the ABN Amro deal
at the preliminary results seven weeks ago, so this does signal a major U-turn,"
said Collins Stewart banks analyst Alex Potter, who estimates the bank will seek
to raise 10 billion pounds.
By 11.05 a.m., RBS shares were up 3.8 percent at 380 pence, outperforming
the FTSE 100 share index, which was 0.03 pct higher at 6,046.5 points. In early
trade, the stock rose as high as 384 pence, an increase of almost 5 percent.
Collins Stewart's Potter said the stock's resilience reflected the view that
RBS' rights issue will help it resolve its capital problems, paving the way for
future growth.
"People are buying on the relief of knowing what is in store. This could be
the bottom," he said.
RBS is the first UK bank to re-capitalise since the onset of the credit
crunch last September.
The credit squeeze, sparked by rising defaults against US sub-prime
mortgages, has paralysed wholesale credit markets, pushing up banks' funding
costs and slashing the value of debt-backed securities they hold as investments.
UK lenders have responded by raising interest rates for consumers,
contributing to a slowdown in house prices, and prompting the Bank of England to
consider relaxing the terms on which it lends to commercial banks in an effort
to improve liquidity.
There has been speculation that Barclays PLC and HBOS PLC, the UK's third
and fourth biggest banks respectively, could also take steps to rebuild their
capital reserves.
At the weekend, mortgage lender Bradford & Bingley PLC was forced to deny
press reports that it was planning a rights issue.
Barclays today declined to comment on vague market talk that it was planning
to rush through a 10 billion pound rights issue as early as Monday, ahead of
RBS' own fundraising exercise.
Analysts at Keefe, Bruyette & Woods estimated that a 12 billion pound rights
issue would lift RBS' core Tier One capital ratio, currently 4.4 percent, to 6
percent, against the European sector average of 5.9 pct.
myles.neligan@thomson.com
mn/mn/ejp/mn/lht
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