View from City Road: Royal Bank issue makes no sense

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The Independent Online
RAISING money just because it is there makes no sense at all. Yet this is the best reason Royal Bank of Scotland could give for its planned share issue yesterday. It is far from satisfactory.

The pounds 418m claim from Wallace Smith Trust, which RBS will contest, is unrelated. Legal proceedings started only last week, when plans for the fund-raising were already well advanced. The bank has not made any provision for the claim.

RBS says the cost of raising money by issuing dollar-denominated preference shares is attractively modest. With US interest rates low, this is fair enough as far as it goes. But other companies are managing to pass up the same opportunity.

Why is RBS taking it? The Scottish bank says it believes in always having as strong a capital base as possible. This sounds over- cautious, even by the high standards of Scottish banks.

Does RBS believe it should raise unlimited amounts of capital, irrespective of the returns it will make? Given that the company accompanied news of its share issue with a profits warning and news of the legal claim, the question is one shareholders should consider at length.

RBS does not have the record or prospects to suggest investors can be sure the money will be profitably invested. Profits have more than halved in the past five years and are expected to nearly halve again this year. Earnings per share have also fallen and costs have risen as a proportion of the bank's income.

Much the same (or worse) could be said about other banks, but they are not raising money at this point in the cycle.

RBS says it will strengthen its capital ratios without recourse to shareholders as a result of the share issue. Though their stakes will not be diluted, shareholders will suffer to the extent that the company will have to pay dividends on the new preference shares.

In any case RBS already has comfortable capital ratios, more than meeting regulatory requirements. What, then, does it want the money for? It says it is for general corporate purposes, though there were suggestions yesterday that it was about to acquire a business. But it appears to have more than enough problems of its own to take on any one else's.

Taken together, uncertainties over the legal action, the profits warning and the fund raising suggest the shares at 153p, down 21p, should be sold.