RBS issue would boost recovery, may tempt others

By Clara Ferreira-Marques - Analysis

LONDON (Reuters) - Royal Bank of Scotland, facing the prospect of Europe's largest rights issue, may now rue its acquisition of ABN AMRO, but shoring up its balance sheet will position it for recovery and could tempt others to follow suit.

After months of dismissing speculation of a capital hike, RBS is set to announce a rights issue as early as next week, an industry source said on Friday, confirming a radical u-turn for Britain's second-largest bank.

The market has heaped much of the blame for this on the ill-timed 71 billion euro (56 billion pound) acquisition of rival ABN led by RBS with partners Santander and Fortis. What seemed a daring approach last summer, before the credit crunch hit, now appears an expression of banking hubris.

But even before the ABN deal and $3.2 billion (1.6 billion pounds) of subsequent writedowns from toxic assets, RBS was sailing close to the wind with some of the European sector's lowest capital ratios, more so even than its stretched peers.

"Global investors, who can choose to buy Citigroup for the recovery or Royal Bank, will say the U.S. banks are better capitalised and have a better chance of returning to growth quicker," analyst Simon Maughan at MF Global said.

"That's what Royal Bank is going to do -- it's trying to make sure it can return to growth as quickly as everyone else."

RBS had a core Tier 1 ratio of 4.5 percent at the end of 2007, well below the sector average of around 5.8 percent. Including only the parts of ABN it will keep once the spoils are divided, analysts estimate a ratio of closer to 4 percent.

A capital hike of around 13 billion pounds, at the higher levels estimated by analysts, could take that ratio well above 6 percent and into line with the European sector.