Page last updated at 16:16 GMT, Tuesday, 22 April 2008 17:16 UK

RBS sets out 12bn rights issue

RBS sign
Other banks are expected to follow RBS in launching a rights issue

Royal Bank of Scotland (RBS), the UK's second-biggest banking group, is asking shareholders for an extra 12bn to shore up its finances.

The rights issue was announced as part of a trading update and is one of the largest seen in UK corporate history.

The firm also announced a write-down of 5.9bn before tax, following its exposure to the credit markets.

BBC business editor Robert Peston said other banks may well follow suit, to reinforce their financial foundations.

RBS will nonetheless benefit from being first to the plate as this announcement will inevitably lead to cash calls from others
Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers

Mr Peston also said RBS would "retain more capital in its balance sheet to meet the risks of default by borrowers than it had been doing".

Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, said: "RBS may have lost the element of surprise as the news was well flagged, but will nonetheless benefit from being first to the plate as this announcement will inevitably lead to cash calls from others".

Analysts speculate that Barclays and HBOS could also be possible candidates for rights issues.

Market conditions

RBS, which played a leading role in last year's takeover of the Dutch bank ABN Amro, said it needed to increase its cash base and a rights issue was the best option.

In its latest update, which covered the period from 31 December to 22 April 2008, RBS said global banking and markets had been "acutely affected by credit market conditions" especially in March.

RBS said it may sell assets to raise funds, which could net it around 4bn. It is reviewing its insurance arm, which includes Churchill and Direct Line among others.

Companies issue extra shares to raise money
They are offered to existing shareholders, usually at a discount to the current share price
Shares are offered in proportion to existing holdings, so if you own 10% of the old shares you are offered 10% of the new ones

The bank said it had seen a "severe and increasing deterioration in credit market conditions, the worsening economic outlook and the increased likelihood that credit markets would remain difficult for some time".

"The rights issue deals with concerns over the balance sheet," said David Cumming, head of UK equities at Standard Life Investments, which holds a 3.5% stake in RBS.

The rights issue enables the bank to add to its reserves - which were hit following the ABN Amro deal, with some analysts now arguing it paid too high a price for the Dutch bank.

When the deal was sealed at the end of 2007, many banks hoped market conditions would improve in 2008.

Since then, however, the impact of problems in the US housing sector has worsened not improved.

And what were viewed as problems of a particular sector - the housing market and specifically risky borrowers known as sub-prime customers - have had a wider economic impact.

Keith Bowman, analyst at Hargreaves Lansdown, said this has now changed what investors think a bank needs in terms of capital in order to offset potential liabilities.

'Moving forward'

Under the terms of the rights issue, 11 new shares will be issued for every existing 18 shares at 200 pence each.

The rights issue value is 46% less than Monday's closing share price of 372.5p. RBS shares ended Tuesday down 3.89% at 358p.

"It's a reassuring discount, and investors will be pleased that it's such a large amount and not 5bn or 6bn - they want RBS to raise some money so that the company can move forward," said Mark Sartori, head of European trading at Fox-Pitt Kelton.

RBS said that, following its integration with ABN, it aimed to cut staff numbers by more than originally planned, and added it was seeking to cut costs by 2.3bn euros, up from an earlier estimate of 1.7bn euros.

The news comes a day after the Bank of England said it would make 50bn available to banks, to help them tackle the credit crisis by allowing banks to exchange their mortgage-backed assets with government bonds.

On Wednesday, RBS is set to have its annual general meeting.

RBS is set to seek approval for the rights issue from shareholders in mid-May.

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