RBS Considers 10 Billion-Pound Capital-Raising Plan

By Ben Livesey

Oct. 12 (Bloomberg) -- Royal Bank of Scotland Group Plc, the U.K.'s fourth-biggest bank, plans to raise at least 10 billion pounds ($17 billion) from investors and the government as the credit crisis worsens, said a person familiar with the matter.

The Edinburgh-based bank may arrange a rights offering underwritten by the U.K. government as part of the rescue plan for the banking industry announced last week, said the person, who declined to be identified because discussions on the transaction are confidential. RBS hasn't ruled out the government's offer to buy preference shares, said the person.

RBS would be the first U.K. bank to use the government's offer to spend as much as 50 billion pounds buying stakes in the country's banks to help them raise capital. RBS needs to absorb more credit writedowns and meet the government's criteria to be eligible for insurance on its short- and medium-term loans as part of Britain's plan to help unlock capital markets.

``It is not an unrealistic possibility that RBS will need to raise about 10 billion pounds,'' said Alex Potter, a London-based analyst at Collins Stewart. ``It is difficult to know whether it is enough. They have raised very little in their disposal program and things have since got worse.''

RBS spokeswoman Linda Harper declined to comment to Bloomberg News on the share sale plan.

Government Stake

Barclays Plc, the U.K.'s second-biggest bank, may sell at least 3 billion pounds of preference shares to investors, two people familiar with the matter said last week.

The British government tomorrow is likely to say it will underwrite share sales of as much as 35 billion pounds in four of the nation's banks, the Sunday Times reported today, without saying how it obtained the information.

RBS will ask the government to underwrite a total of 15 billion pounds in capital raising and the state may end up owning half of the company, the Sunday Times said. Bank of England Governor Mervyn King told financial institutions to ask for more money than they need, the newspaper said.

RBS had planned to raise about 4 billion pounds from asset disposals in addition to the 12.3 billion pounds it raised in a rights offer earlier this year. The bank abandoned plans to sell the Australian and New Zealand investment-banking units of ABN Amro in August after failing to find a buyer, and has struggled to sell its U.K. insurance unit for about 7 billion pounds.

Writedowns

RBS, which has written down 5.9 billion pounds of assets this year, slumped 62 percent in London trading last week amid concern about capital and further writedowns. The decline reduced the company's market value to less than 12 billion pounds, making it Britain's fourth-largest bank by market value, down from No. 2 earlier this year.

The bank may take losses of as much as 500 million euros ($673 million) on holdings tied to Icelandic banks, which were rescued by the island country's government last week.


RBS is also struggling with rising defaults and the worst housing slump since the Great Depression in the U.K. and U.S., where it lends to consumers and companies through its Citizens unit. The bank posted a loss of 761 million pounds in the first half of the year, its first in 40 years, because of subprime related writedowns.

RBS Chief Executive Officer Fred Goodwin has been criticized for eroding the bank's capital base by paying too much for acquisitions, including ABN Amro last year, just as the credit crisis was taking hold.

Goodwin Leaves?

``I would be very surprised if all of them keep their jobs,'' Opposition Conservative Leader David Cameron told Sky News today, when asked if bank executives should resign. ``It is a matter for the boards of all the individual banks but I think in some cases there will be -- if I can put it in this way -- a very robust argument, because clearly, mistakes have been made.''

Goodwin, 50, and Chairman Tom McKillop don't need to stand down to raise capital under the government plan, RBS said Oct. 8, denying reports that it will require them to be ousted.

``The important thing is to get through this crisis,'' Angela Knight, chief executive officer of the British Bankers' Association, which represents the U.K. banking industry, told Sky News today, when asked if HBOS Plc and RBS executives should quit.

``I don't think you should say it is just one person who for some reason ought to have been aware of consequences,'' Knight said. ``It's difficult to find anyone who realized, who thought for a moment that you could get this sort of panic, this sort of meltdown.''

Government Talks

Goodwin is in talks with the government, the Bank of England and the Financial Services Authority this weekend about the deal and may announce the capital raising as early as tomorrow, the person said. The government will unveil the plan for four banks seeking funds tomorrow, the Sunday Times reported.

Goodwin would step down if it helped secure fresh financing for RBS, the Times reported yesterday, without citing anyone.

Stephen Hester, chief executive officer of British Land Co. and a non-executive director of RBS, will replace Goodwin, the Times said. Some unidentified investors also want RBS Chairman Tom McKillop to be replaced by Philip Hampton, the chairman of J Sainsbury Plc, according to the newspaper.

Raising about 10 billion pounds would boost the bank's so- called core equity Tier 1 capital ratio, which stood at 5.7 percent on June 30, and lift its overall Tier 1 ratio to almost 11 percent from 8.6 percent, satisfying government capital requirements, Sanford C. Bernstein & Co. analysts estimate.

The U.K. plan requires RBS and seven other lenders, including London-based Barclays, to raise their capital reserves by 25 billion pounds by the end of the year. Prime Minister Gordon Brown's government has offered to buy 25 billion pounds of bank shares to help meet this target and stands ready to provide another 25 billion pounds.

``The banks need to get out there and start raising capital,'' said Leigh Goodwin, a London-based analyst at Fox-Pitt Kelton Ltd. ``RBS has wholesale funding exposures, too much leverage and a relatively weak capital position.''

To contact the reporter on this story: Ben Livesey in London blivesey@bloomberg.net