RBS to Raise $20 B via Rights Offering

As its credit-crunch losses pile up, the Royal Bank of Scotland will try to raise cash with a massive discounted sale of new shares

Royal Bank of Scotland will launch a massive rights issue next week to shore up its capital base as losses from the credit crunch continue to mount.

The discounted sale of new shares is likely to be for £10bn or more, making it one of the biggest ever cash calls from investors. Britain's second-biggest bank, which owns NatWest, is set to announce the share issue before its annual general meeting on Wednesday.

RBS has been under pressure to raise fresh capital for months, but has until now withstood calls for a rights issue. However, with US banks such as Wachovia and Merrill Lynch making massive further writedowns from the credit crunch in recent days, there will be further hits for UK banks.

The move leaves the job of Sir Fred Goodwin, RBS's chief executive, in the balance as investors digest the news.

Sir Fred drove through the €71bn (£56bn) acquisition of ABN Amro by an RBS-led consortium last year, even as financial markets were crashing, leaving RBS's core capital buffer depleted. The ABN deal could prove one too many for RBS's investors, many of whom have supported Sir Fred's deal-making reluctantly.

While RBS has until now said it did not feel compelled to raise capital, it could justify a U-turn by saying that the market meltdown is unprecedented and there is now a need for capital simply to boost confidence in the system.

Sir Fred could cling on if other banks follow RBS in raising cash. Bradford & Bingley has already considered a capital raising but its board decided against a cash call, at least in the short term.

"RBS notes recent speculation about a possible rights issue. RBS confirms that its Interim Management Statement covering trading performance and capital will be made next week," the bank said today.

Alarm bells rang yesterday when it was revealed RBS had cancelled at least three investor meetings for the second half of this week, two of which were to include Sir Fred. Speculation mounted that RBS was planning a rights issue or the disposal of a major asset, such as its Direct Line insurance business.

RBS's share price has been hit by concerns that its depleted capital buffer against unexpected losses could force it to cut its dividend or raise cash from shareholders. Analysts had calculated that for RBS's equity tier-one ratio to match the average for European lenders, it would have to launch a £12.5bn rights issue.

The bank's shares were little changed, down 0.3 per cent at 366p, in late morning trading.

Alex Potter, banking analyst at Collins Stewart, said: "There has always been a fear that a rights issue would come along. When it comes along, it becomes a base line for the stock. You have quantified your problems."

Regulators and politicians around the world are calling on banks to shore up their capital buffers to restore confidence in the financial system. Central bankers also fear that capital-constrained banks will limit their lending, making the economic slowdown more severe.

Mervyn King, Governor of the Bank of England, has twice called on UK banks to recapitalise, but his demands were resisted. With the Bank finally listening to the banks' demands and preparing a massive asset swap to boost liquidity, there is said to be an implicit quid pro quo that banks will bow to Mr King's demands.

The bank's ratio of tier-one capital to risk-weighted assets at the end of last year was 7.3 per cent and its core tier-one ratio was 4.5 per cent—above the accepted minimum of 4 per cent.

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