Banks in distress: should shareholders answer the cash call?

Investors invited to raise their stake should think before they buy. By Laura Harding and Julian Knight

Thanks to the credit crunch, many of the UK's biggest banks have run short of ready cash. They need to shore up their finances and one way to do this is via a rights issue.

This is when a company, in a bid to raise funds, creates more shares and sells them to existing shareholders at a discount. Last week Halifax Bank of Scotland (HBOS) set out its plans to raise £4bn in this way. The bank gave its shareholders the right to buy two new shares for every five existing ordinary shares at 275p each, reduced from 345p.

The discount price gives investors an incentive to buy. If they decline the offer, they can find their current holding is diluted as more shares come on to the open market.

HBOS has more than two million shareholders across the UK and the average holding is 374 shares. Under the proposed rights issue, the average individual shareholder will be allowed to buy 149 new shares at 275p per share – a total cost of £409.75. If the rights are not taken up, the company may sell them on the stock market.

Dennis Stevenson, the chairman of HBOS, told shareholders that its rights issue would "strengthen the group's capital base".

It's not just HBOS that is asking shareholders for extra cash. In April, Royal Bank of Scotland (RBS) announced a £12bn rights issue. The issue, which closed on Friday, means 11 new shares will be issued for every existing 18 shares at 200p each, about 30 per cent below the UK market price. And last Tuesday, as part of a disastrous trading statement, the UK's eighth-biggest bank, Bradford & Bingley, was forced into the humiliating step of reducing the price it had announced for its rights issue. The bank's 850,000 shareholders will now be offered the shares at 55p each rather than the originally proposed 82p.

In total, just over three million shareholders are affected by the rights issues being carried out by RBS, HBOS and Bradford & Bingley, and if you are one of them then you are entitled to buy the new shares.

But it could be the wrong move to snap them up just because they are cheap. Ian Hudson of independent financial adviser Hudson Green and Associates warns: "First of all ... do you really want to buy further into a company that needs more money to stay liquid? You should be a bit cynical about that. You should also think about the financial commitment ... especially if you haven't got a lot of money to spare."

Graham Ashby, UK head of retail equities at the banking giant Credit Suisse, says mounting personal financial pressures could also deter shareholders: "The timing of these rights issues from the banking sector for many investors couldn't be much worse.

"With disposable incomes under pressure due to rising energy costs, food inflation and mortgage payments, some investors may be reluctant to throw good money after bad – particularly as the dividends for these will be significantly reduced from last year's levels."

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

Arts and Entertainment
Women protest at the rape and murder of Jyoti Singh
tvReview: It's a tough watch, but the details of the brutal gang rape and murder of medical student need to be shared if we want to strive for global gender equality
Life and Style
Living for the moment: Julianne Moore playing Alzheimer’s sufferer Alice
A propaganda video shows Isis forces near Tikrit
voicesAdam Walker: The Koran has violent passages, but it also has others that explicitly tells us how to interpret them
Life and Style
love + sex
Arts and Entertainment
Victoria Wood, Kayvan Novak, Alexa Chung, Chris Moyles
tvReview: No soggy bottoms, but plenty of other baking disasters on The Great Comic Relief Bake Off
Ashley Young celebrates the winner for Manchester United against Newcastle
footballNewcastle 0 Man United 1: Last minute strike seals precious victory
Life and Style
Tikka Masala has been overtaken by Jalfrezi as the nation's most popular curry
food + drink
Benjamin Netanyahu and his cartoon bomb – the Israeli PM shows his ‘evidence’
Arts and Entertainment
80s trailblazer: comedian Tracey Ullman
Arts and Entertainment
Stephen Tompkinson is back as DCI Banks
tvReview: Episode one of the new series played it safe, but at least this drama has a winning formula
Arts and Entertainment
Jeffrey Archer holds up a copy of 'Kane and Abel', a book he says was ripped-off by Bollywood
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Graduate Application Support Analyst

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Reach Volunteering: External Finance Trustee Needed!

    Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

    Christine McCleave: FP&A Analyst

    £36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

    Recruitment Genius: Sales Executive - OTE £40,000

    £15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

    Day In a Page

    War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

    Baghdad fights to win back Tikrit from Isis – but then what?

    Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable
    Living with Alzheimer's: What is it really like to be diagnosed with early-onset dementia?

    What is it like to live with Alzheimer's?

    Depicting early-onset Alzheimer's, the film 'Still Alice' had a profound effect on Joy Watson, who lives with the illness. She tells Kate Hilpern how she's coped with the diagnosis
    The Internet of Things: Meet the British salesman who gave real-world items a virtual life

    Setting in motion the Internet of Things

    British salesman Kevin Ashton gave real-world items a virtual life
    Election 2015: Latest polling reveals Tories and Labour on course to win the same number of seats - with the SNP holding the balance of power

    Election 2015: A dead heat between Mr Bean and Dick Dastardly!

    Lord Ashcroft reveals latest polling – and which character voters associate with each leader
    Audiences queue up for 'true stories told live' as cult competition The Moth goes global

    Cult competition The Moth goes global

    The non-profit 'slam storytelling' competition was founded in 1997 by the novelist George Dawes Green and has seen Malcolm Gladwell, Salman Rushdie and Molly Ringwald all take their turn at the mic
    Pakistani women come out fighting: A hard-hitting play focuses on female Muslim boxers

    Pakistani women come out fighting

    Hard-hitting new play 'No Guts, No Heart, No Glory' focuses on female Muslim boxers
    11 best gel eyeliners

    Go bold this season: 11 best gel eyeliners

    Use an ink pot eyeliner to go bold on the eyes with this season's feline flicked winged liner
    Katarina Johnson-Thompson: Heptathlete ready to jump at first major title

    Katarina Johnson-Thompson: Ready to jump at first major title

    After her 2014 was ruined by injury, 21-year-old Briton is leading pentathlete going into this week’s European Indoors. Now she intends to turn form into gold
    Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

    Climate change key in Syrian conflict

    And it will trigger more war in future
    How I outwitted the Gestapo

    How I outwitted the Gestapo

    My life as a Jew in wartime Berlin
    The nation's favourite animal revealed

    The nation's favourite animal revealed

    Women like cuddly creatures whilst men like creepy-crawlies
    Is this the way to get young people to vote?

    Getting young people to vote

    From #VOTESELFISH to Bite the Ballot
    Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

    Poldark star Heida Reed

    'I don't think a single bodice gets ripped'
    The difference between America and Israel? There isn’t one

    The difference between America and Israel? There isn’t one

    Netanyahu knows he can get away with anything in America, says Robert Fisk
    Families clubbing together to build their own affordable accommodation

    Do It Yourself approach to securing a new house

    Community land trusts marking a new trend for taking the initiative away from developers