Fears RBS could follow rival US banks

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Royal Bank of Scotland shares remained under £4 for the second day running yesterday on fears that it might follow US rivals and raise fresh equity to shore up its capital base.

Concern mounted after Citigroup and Merrill Lynch, two of Wall Street's biggest banks, announced a combined $21bn (£10.7bn) of capital injections on Tuesday to boost their battered balance sheets in the wake of the credit crunch. Investors included Singapore and Kuwait state investment funds and the Korean government. The banks' raising of capital came soon after earlier injections from investors including the Abu Dhabi government and Singapore's Temasek.

Citi and Merrill's capital injections came on the same day as a note from UBS analysts that said RBS would suffer most from "de-gearing" of its capital base. The analysts also said that UK banks might announce capital raisings but that it was not inevitable. The news pushed RBS's shares below £4 for the first time since August 2000 and they remained there yesterday, closing little changed at 391.25p.

Some analysts have come out with specific predictions for an RBS capital boost. Cazenove said last month that RBS could be forced into a £5.8bn rights issue because of writedowns on assets hit by the credit crunch. But most analysts are wary of making predictions because there is not enough information about RBS or its rivals ahead of full-year results next month.

In their note, the UBS analysts said: "With over £1trn of exposure to debt securities and undrawn commitments, the 'Big four' domestic banks have to dramatically increase disclosure in these areas if they are to allay concerns of additional write-downs."

If RBS was to announce a capital injection it would need to do it very soon, to leave time for the dust to settle before its results on 28 February, or on results day. The worst scenario would be for Sir Fred Goodwin, the chief executive, to reassure analysts at results and then announce a rights issue or other capital boost later in the second half.

RBS said last year that it expected to have a 4.25 per cent equity tier one ratio at the end of 2007. That leaves the bank close to the 4 per cent guideline, which could be bridged if it had to make significant additions to the £1.3bn of writedowns it announced at its December trading statement. Regulators look at the total capital ratio, which is comfortable for RBS, but equity investors focus on tier one and its core equity component for confidence in a bank.

RBS is a major player in the debt markets but its exposure to the US sub-prime crisis is nothing like that of US banks like Citi. If necessary, RBS could sell off assets, such as its Angel Trains leasing business, which is on the block for up to £4bn. A sale announcement could come before results to ease investors' nerves.