RBS is lashed by City over ‘unambitious’ cash call plan

Hugo Duncan
21 Sep 2009

The City today branded plans by Royal Bank of Scotland (RBS) to raise fresh funds to cut its reliance on Government support “unambitious” and “tempered”.

Shares in the bank, 70% owned by the taxpayer, fell 6% on news it has started talks with investors to gauge appetite for a “modest” rights issue of between £3 billion and £5 billion.

RBS, led by chief executive Stephen Hester, hopes the fundraising will help it water down its involvement in the Government's Asset Protection Scheme (APS), set up to insure toxic bank loans.

RBS initially planned to put £325 billion of dodgy assets into the programme, but wants to improve the terms of the deal now conditions in the economy are improving.

The original deal would see the Government stake in RBS rise from 70% to nearly 85%. Hester now wants to give private investors the chance to maintain or increase their stakes as well.

But analysts said the plan lacked the ambition of that put forward by rival Lloyds Banking Group, which is 43% owned by the taxpayer. Last week Lloyds said it was looking at ways of withdrawing from the APS altogether by raising £15 billion or more through a rights issue. It initially planned to insure £260 billion of toxic assets.

Analysts said that while Lloyds chief executive Eric Daniels was pressing to free the bank from state control, Hester was merely looking to limit the Government's stake to 70%.

It is feared that without radical action, both banks face being broken up by the European Commission as punishment for taking state aid.

Simon Maughan of MF Global said: “It looks quite disappointing. It looks decidedly unambitious when put against the Lloyds plan which took on the Government. There are cojones to the Lloyds proposal but this one from RBS looks a bit tempered.”

Joshua Raymond of City Index said: “It is clear that if both UK banks can avoid part of the scheme, they may try it. But that is a big question mark in itself and may result in unwanted share price pressures.”

Roderick Wallace of Barclays Wealth said the outlook for UK banks “remains bleak” and warned that the recent share price rally at RBS is “unjustified”.

RBS shares today lost 3.5p to 52.8p while Lloyds fell 3.5p to 107.1p. It left the taxpayer sitting on paper profits of £900 million on its £20 billion investment in RBS and a £1.8 billion loss on its £14.5 billion investment in Lloyds. Both banks were saved by the Government last autumn following the collapse of Wall Street giant Lehman Brothers. Lloyds hit problems after its emergency takeover of stricken rival HBOS — a deal backed by Gordon Brown — while RBS was crippled by its acquisition of ABN Amro for more than €70 billion (£63.4 billion).

The banks now argue they are more healthy than was feared when the APS was subsequently launched in February to insure toxic assets on their battered balance sheets.

Regulators, however, are not convinced, and it is thought the Financial Services Authority told Lloyds last week that it would fail its stress test if it withdrew from the APS altogether.