Friday, 18 April 2008

RBS: Be Careful What You Wish For . . .



At long last, RBS is bowing to the inevitable and
looking for more equity. Lots of it. And as is so often the case, it’s not the deed itself that makes them look really stupid (why shouldn’t more equity be needed at a time like this ?), as the months of denial.

Back in the summer we covered their ‘successful’ out-bidding of Barclays for Dutch bank ABN-Amro, and wondered at the time whether they’d be pleased with what they’d done. Big take-overs can be really clever when done at the bottom of the market (e.g. BP taking Amoco and Arco when oil was $ 10 / barrel - only a decade ago !). But they look pretty crass when they are carried out on the very brink of a massive down-turn, which was clearly on the cards last September, if not a racing certainty.

So – not very popular with existing RBS shareholders, one might imagine. And there’s another group that may not be over the moon: the UK banking authorities (BoE ? Treasury ? FSA ? anyone know these days ?). Because now, in extremis, they will have the larger RBS+ABN entity to prop up. As we revealed exclusively on C@W way back last May, with ABN having flown the coop, the Dutch authorities have no intention of picking up the tab …

ND


PS - get well soon Mr CU !


20 comments:

Mark Wadsworth said...

Raising £12 bn against market cap of £36 bn looks about right.

Ballpark, maybe half the banks' Tier One capital has been wiped out, even more ballpark, Tier One capital = market cap.

Other way of calculating - total household debts £1,400 x 5% to be written off by banks = £75 bn. RBS has 20% market share (?) so it'd need about £15 bn to stay afloat.

Nothing to panic about, really.

CityUnslicker said...

depends if you are shareholder or not Mark!

Mark Wadsworth said...

If you're a shareholder you're knackered either way. Not my problem.

Nick Drew said...

That's the spirit !

remember when we were being told that banks had been heavily oversold and were a really good bargain ? That must have been, oooh, October ?

Blue Eyes said...

The people who told us that banks were too profitable a short while ago must be laughing their heads off. I'm alright Jack, because I hardly have any investments, have plenty of unsustainable debt and we have a PM who believes in Moral Hazard. Just watch those printing presses go!

CityUnslicker said...

what sort of idiot would have bought RBS at 340p a share a few weeks ago eh, umm......

Schadenfreude said...

RBS announces "We are a bunch of lying morons. Please give us more of your money".

Should go down well.

matt said...

This is what has concerned me. The American banks are obviously in this the thickest, but they have been slooowwwllly admitting losses.

All major foreign banks have exposure to American mortgage securities. With the exception of the German banking sector, we are not seeing nearly enough write downs on assets.

About 2.5 percent of my portfolio (5% of my non-cash portfolio) is in Singapore banks. They aren't admitting losses. It seems unlikely that Singapore banks were prescient enough to dodge this bullet--the U.S. mortgage market.

I wonder when I will get my lumps.

Anonymous said...

O/T
Mr Drew: Your presence is requested chez Hatfield Girl for a few minutes.

Richard Elliot said...

I'm so pleased I bought some shares during January........

Semaj Mahgih said...

Be nice to know your take on the 50bn bonds transfer of the BofE.

Newmania said...

Nothing to panic about, really.

If the Doctor told you ,you are 'probably' not going to die would you retain suave equanimity. If RBS were in serious trouble it would be Armageddon -out of here ...so I think I will panic a little if that’s alright
I can’t say I have much of a perspective on Banking but the perpetual trouble with Insurance , which I do understand , is that the many safeguards built into the system all funnel back into the same money. This means two dimensional calculations about stability are usually worthless . If we hear much more about major banks in trouble it could lead to a step change in the problems we face here which are still reckoned to me mild compared to the US. .(and that is a supposition that makes me nervous for a start)

Get well soon CU you shirking slacker

Nick Drew said...

Good to see you Mr Mania. You are right about the self-referential nature of most of the safeguards, but I'd say two other things

- existing capital adequacy rules (for banks & others) have been taken to the limit and beyond by aggressive bankers 'taking a view', and by regulators turning a very culpable blind eye

- I'm not sure how far you can expect individual firms to go in providing systemic security. Recall that risk management operates at the 95% confidence level (sometimes only 90%) and if shareholders want better than this they must diversify their own portfolios (not difficult these days).

Obviously we should insist firms make realistic calculations in their risk assessments (they cut corners here too, Mr Regulator). But the final 5% lies with (a) investors / diversification and (b) governments / regulators

the cost to investors of firms themselves being made to operate to 99% would, I suggest, be prohibitive, and all manner of business would dry up

Difficult issues

Alice Cook said...

RBS are running out of regulatory capital. If it wasn't for NRK, there might be run on the bank. However, after the summer's excitement with the Wreck, everyone now knows that there is a 100 percent guarantee on UK personal deposits. So RBS will have to either raise more cash via a share issue or be taken over.

Alice

ps - how about exchanging links. My site is UK bubble - the address is:

http://ukhousebubble.blogspot.com

Newmania said...

all manner of business would dry up



My clients are already telling me their order books are emptying out.

Steven_L said...

Well I'm a bit peed off as a taxpayer, I might as well be a shareholder by the looks of things, only I'd be holding some kind of over-priced reverse-prefence share that only the victim of a boiler-room scam would buy!

Nick Drew said...

Matt - well good luck. Out of curiousity - why didn't you exit those positions a while ago ? As I've said here before, the dominos fall slowly - often, slowly enough to do something

anon - thanks, noted & acted

James - it means it's definitely to be inflation, not deflation (which several folks had already opined)

Mr M, Steven - yup: scary stuff

Alice - welcome. When my good friend the Administrator (the estimable CU) returns to the land of the living I will ask him nicely to do this

Alice Cook said...

Nick

Much appreciated. I have already put in a link to your site on UK bubble.

Alice

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