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Nye Lavalle
RBS Takes Further Write-Downs,
Plans $23.78 Billion Rights Issue
Stretched by Acquisition,
Bank Seeks to Boost Capital
Through Disposals
April 22, 2008 6:21 a.m.
LONDON -- Royal Bank of Scotland PLC Tuesday said it took a further £5.9 billion in pretax write-downs and will take steps to shore up its balance sheet, asking shareholders to approve a £12 billion ($23.78 billion) rights issue in addition to seeking disposals of noncore assets.

The rights issue, which is fully underwritten by Goldman Sachs, Merrill Lynch and UBS, will replace some of the capital-depletion the group has suffered through its £10 billion acquisition last year of assets of ABN Amro Holding NV, as well as from deterioration in the value of mortgage and other securities.

RBS, Britain's second-largest bank by market capitalization, acquired assets from the Dutch giant as part of a consortium that also included Belgian-Dutch group Fortis and Spain's Banco Santander.

"In the light of developments during March -- including the severe and increasing deterioration in credit market conditions, the worsening economic outlook and the increased likelihood that credit markets could remain difficult for some time -- the board has concluded that it is now appropriate for RBS to accelerate its plans to increase its capital ratios and to move to a higher target range to reflect the generally weakened business environment," the bank said in a statement.

Shares in the bank opened down 3.9% in London after the announcement.

RBS executives said the bank's performance had been satisfactory in January and February and it was only in March that mark-to-market declines accelerated. Based on that acceleration, the £5.9 billion in pretax write-downs are expected to stand for the whole of 2008, Chief Executive Fred Goodwin told a conference call, adding the bank had been very "stringent" in this regard. For 2007, the bank had written down a net £1.62 billion after some gains on its own debt.

The bank said it has identified RBS Insurance and other smaller assets for "whole or partial" disposal, and assumes it can raise £4 billion this way, though it may be able to reach the 6% tier 1 ratio with fewer disposals.

Addressing speculation that RBS might sell its U.S. operations or its stake in the Bank of China, Mr. Goodwin said "it would be a mistake to sell the U.S. business," and that the bank hadn't considered a sale of the Bank of China stake.

The rights issue will be made on the basis of 11 new shares for every 18 existing shares at an issue price of 200 pence per share, representing a 46.3% discount to Monday's closing price of 372.5 pence. The bank will publish a prospectus of the rights issue in early May, while trading in the new shares is expected to commence in June.

The rights issue and disposals together are expected to bring Royal Bank of Scotland's ratio of capital against risky assets, also known as the core tier 1 ratio, up to an estimated 6% at the end of June this year from 4.5% at the end of 2007. Regulation calls for core capital to cover 4% of risk-weighted assets.

In the conference call, executives denied speculation that the rights issue came as a result of pressure from the U.K. government. The capital-raising announcement comes a day after the Bank of England announced a new facility allowing banks to swap around £50 billion of mortgage-backed and other securities for nine-month U.K. treasury bills in a bid to shore up the British financial system. The plan was a result of several months of discussions between banks and regulators, and a number of U.K. banks have been expected to announce plans to raise capital and announce new write-downs in the weeks following its launch. (See related article).

While asking shareholders to approve the rights issue, the group will still ask shareholders at the annual general meeting Wednesday to approve a final dividend payment of 23.1 pence per share, totaling £2.3 billion. With respect to future dividends, RBS said the board believes the payout ratio of 45% remains sustainable over the medium term.

Richard Hunter, analyst at Hargreaves Lansdown Stockbrokers, said RBS would benefit from being the first of Britain's big banks to go to its shareholders for a capital injection. "The depth of the discount on the shares being offered will almost certainly ensure a healthy take-up from existing investors," Mr. Hunter said. However, he added: "Equally, the statement will raise serious questions since the bank has only recently increased its dividend by 10% whilst insisting that it had no need to shore up its capital."

RBS issued a vote of confidence in its management, saying the executive team "will be able to lead RBS through the current challenging conditions, deliver the transaction benefits relating to the acquisition of ABN AMRO, and realize the substantial value in RBS's U.K. and international franchises." However, searches are underway to recruit three new non-executive directors with experience appropriate to the enlarged group's operations, the bank said.

--The Associated Press contri
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