RBS Said to Consider 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 couldn't immediately be reached for comment.

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.

Executives

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.

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.

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 Plc, 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