RBS: When you’re trapped in a bear-hug, any extra air is welcome. The UK government’s suffocating 70 per cent stake in Royal Bank of Scotland would rise to 82 per cent if the lender signed up for state insurance on £294 billion of its riskiest assets.
Now the bank is mulling a rights issue to keep that unwelcome holding below 80 per cent. This may seem of marginal benefit. But a cash call would be about much more than fine-tuning the bank’s answerability to taxpayers.
RBS has been told by its advisors that institutions would fund a capital-raising of between £3 billion and £5 billion, according to a person familiar with the situation. That would substantially deal with the £6.5 billion fee that the bank has agreed to pay for the cover, in the form of new B-shares issued to the government.
But it would still leave RBS issuing £13 billion of these special shares to the state in a side-deal agreed in February alongside the loan-loss insurance. At £5 billion, a rights issue would leave the government at 77 per cent if the state sold all its rights. Institutional investors would hardly be punching the air.
The UK’s other state-dominated bank, Lloyds Banking Group, is seeking to go much further in shaking off the government, by reducing the £260 billion of assets earmarked for insurance by between a half and three-quarters. It has yet to fall under state control —and is keen to keep it that way.
RBS is similarly keen to renegotiate the terms of its participation in the loan-loss insurance scheme — in particular a clause requiring it to surrender up to £11 billion of deferred tax assets. But its bargaining power is more constrained given its smaller base of private shareholders. Limiting the increase in the government’s stake may be the best outcome it can hope for.
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That said, a successful rights issue would have other substantial benefits. It would signal investor confidence in chief executive Stephen Hester’s strategy to de-lever the lender and refocus it on the less racy parts of the banking business. It would also be the first time in ages that RBS shareholders have stumped up something other than extinction-avoidance money.
This would be a big boost to sentiment. And that would lay a firm foundation for future sales of new shares by the company — or of existing shares by the government.
