RBS set to scrap cash payout as it plans biggest rights issue ever

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The Independent Online

Royal Bank of Scotland is considering scrapping its final dividend or making the payout in shares as it prepares for what could be the biggest rights issue in corporate history.

Britain's second-biggest bank is raising capital because credit-crunch writedowns so far this year are set to hit £5bn, blowing a hole in its already thin buffer against losses.

RBS wrote down a net £1.6bn, excluding losses at ABN Amro, last year. But with US banks making massive extra write-downs and regulators telling lenders to come clean about their exposures, the bank is set to announce writedowns about three times that size for the year to date.

RBS is also likely to tell shareholders at Wednesday's annual general meeting that its dividend will be held flat or cut in future to conserve capital.

The bank, which owns NatWest, will consult its major shareholders over the weekend about a massive rights issue that will be unveiled before the AGM in Edinburgh. If the rights issue exceeds £10bn, which is likely, it would be the biggest ever ahead of Belgian bank Fortis's $19.2bn (£9.6bn) share issue last year to pay for its chunk of ABN Amro.

As well as discussing details of the bank's proposed capital injection, RBS will seek investors' verdict on whether Sir Fred Goodwin, the bank's chief executive, should remain in his job.

Sir Fred's position at the bank is severely threatened after he drove through RBS's £10bn purchase of ABN Amro's wholesale banking and overseas retail operations last year. With bank shares plunging and credit losses surging, Sir Fred was widely criticised for sticking to his original price to buy the bank.

A number of shareholders, including one of the bank's biggest investors, have said Sir Fred is unlikely to survive. The chief executive became increasingly unpopular with investors as he embarked on a string of acquisitions after RBS's transformational £21bn takeover of NatWest in 2000. After riding out criticism of 2004's $10.5bn acquisition of Charter One in the US, he riled shareholders by purchasing a stake in Bank of China in 2005. After Chinese shares surged, RBS made a big paper profit on its holding. Sir Fred forswore major deals in 2006, but when Barclays began talks with ABN Amro early last year Sir Fred assembled a consortium with Santander of Spain and Fortis to buy the Dutch bank for £56bn.

"Seven weeks ago, he said capital was fine and the ABN deal was a really good idea and then he does a rights issue. That looks naive," a banking analyst said.

But others argue that deposing the 49-year-old in the middle of market turmoil and the massive integration of ABN Amro is not the right move.

"To increase operational risk by changing people at this stage I would have thought is inappropriate. But the questions will come back [later]," a major institutional investor in RBS said.

Scrapping the dividend or paying it in shares would save RBS £2.3bn. UBS, Switzerland's biggest bank, has gone down the same route as part of its SFr15bn (£7.37bn) capital raising exercise.

RBS announced an increase of the final dividend to 23.1p from 22.1p at its full-year results in February as it boosted the total annual payout by 10 per cent. The increase was billed as a sign of strength at the time, but banks' decisions to raise their dividends in the middle of the credit crunch have been questioned by the Bank of England and other critics.

The bank's stock has been battered since the credit crunch because of concerns about its capital position. RBS shares rose 4.9 per cent to 384p yesterday as hedge funds covered short positions and some investors decided that the rights issue would create a floor for the share price.

"We believe RBS will have little trouble raising capital and that £10bn or so would materially remove the capital-risk bear story at RBS. Therefore, whilst the rights issue will be dilutive, it is likely to mark the floor for the stock," Collins Stewart analysts said.

Santander, RBS's long-time ally, revealed in its annual report that it had bought 2.3 per cent of RBS last year.

Sir Fred: Should he stay or should he go?

*David Buik, market analyst, BGC Partners:

"Fred Goodwin is as good as you'll get, but he will be a chastened individual after this episode. I don't think they should get rid of him. He has the right vision; they'll just need to rein him in a bit."

*Richard Peirson, fund manager, AXA Framlington:

"I blame him for the position RBS is in, but he does have huge experience in integrating acquisitions well, and the group needs that at the moment. Normally when things go wrong the chief executive's head rolls, but in this case it's hard to know who to replace him with. Maybe the way to square the circle is to make sure Sir Fred is in charge of running the day-to-day business, while the strategy is left in the hands of the chairman and the board."

*Jane Coffey, head ofequities at Royal LondonAsset Management:

"I think his position has been pretty shaky for a long time. Everybody said that if he was going to cut the dividend or do a rights issue he would have to go, and I think he should anyway."

*JonMoulton, founder of AlchemyPartners:

"The prospects for Fred arefairly clear.He's always had a likingfor golf. "

*Ian Henderson,fund manager JP MorganAsset Management,RBS shareholder:

"The market was clearly anxious about the ABN deal, and people still question whether it was a good thing to do. RBS is not a worthless franchise, but nevertheless it has obviously become overextended, and it is not unreasonable to suggest that the leader at the time maybe should be thinking about saying, well, 'Maybe I should start looking for a successor.' This may be a good time for him to pass the baton."

*Colin McLean, managing director, SVM Asset Management

"We have seen a complete reversal of strategy from RBS, and there seems to be a big potential for a dividend cut. Inevitably this puts the management under pressure."

*Vince Cable, LiberalDemocrat spokesmanon Treasury affairs:

"Sir Fred is doing the right thing with the rights issue, so his positionshould not be untenable.RBS is doing what theother banks should be doing,in fact the Governmentshould be forcing them todo right now. The bankshave got themselves into a mess, but Goodwin should not be punished for putting his hand up first to try and sort it out."

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