Royal Bank of Scotland is set to announce a rights issue next week, an industry source said on Friday, in a move which analysts believe could raise over $20 billion and lead to similar action by other UK banks.
The capital increase, long rumoured in the market but frequently dismissed by RBS management, is a radical u-turn for Britain's second-largest bank and the first major capital hike for a British lender since the start of the credit crunch.
It could also, as potentially the largest capital increase to date in Britain, mark the end of an era for the bank's well-respected chief executive, Fred Goodwin. Analysts and shareholders say he would face an uphill struggle to push through a hefty capital increase and remain in the job. RBS said in a statement on Friday that it noted speculation about a possible rights issue, but gave no further comment. It is due to publish an update on its trading performance and capital on Wednesday, to coincide with its shareholder meeting.
RBS has so far suffered a relatively modest $3.2 billion writedown from toxic assets, but it bears the scars of recent market turmoil and its balance sheet was stretched by its leading role in the 71 billion euro ($113.3 billion) take-over and break-up of Dutch bank ABN Amro last year.
"Broadly speaking, I think it would be a good thing. I wish they'd done it before - and I don't think anyone is that surprised," Edward Collins, a fund manager at New Star Asset Management who owns RBS shares, said. "But (Fred Goodwin) is going to have to explain the reasoning. He's been emphatic it wasn't going to happen and this calls into question some of the assumptions they made when they did the ABN deal, albeit under different market conditions."
The bank has some of the weakest capital ratios among European banks, with a core Tier 1 ratio of 4.5 percent at the end of 2007, well below the UK sector's 5.8 percent average, and seen as a key reason for its share-price underperformance.
RBS avoided a rights issue after its acquisition of Charter one in 2004, but the market environment this time has already pushed a string of major banks from Merrill Lynch to UBS into emergency fundraising, and will make it far tougher to rebuild ratios through earnings and asset disposals.
Shares in RBS, which have dropped 18 percent so far this year and largely discount a capital increase, initially rose strongly on reports of a capital hike and were up 1.1 percent at 370p by 1033 GMT, valuing the bank at 38 billion pounds.
"The valuations are already so low - if they don't do a rights issue, over time they will rebuild their capital ratios. If they do, it will be dilutive to returns but at least the capital fears would be erased and they will rerate," Exane BNP Paribas analyst James Eden said. "It puts the fear behind them."
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