Will Royal Bank of Scotland's Reverse Split Help Its Share Price?

On November 7, 2008 Royal Bank of Scotland Group plc (RBS) completed a reverse split in the ratio of 20:1 of its ADR shares traded in New York.

This reverse split was first announced on Oct 30,2008 (Source: RBS Investor Relations Site):

Royal Bank of Scotland Group PLC- RBS Ratio Change for ADR Holders

“To maintain an appropriate price range for The Royal Bank of Scotland Group American depositary shares (”ADSs”) representing ordinary shares trading on the New York Stock Exchange, (NYSE Symbol: RBS), effective November 7, 2008, the ratio of one (1) ADS representing One (1) ordinary share will change to one (1) ADS representing 20 (twenty) ordinary shares.

Existing ADR holders will receive one (1) “New” ADS for every twenty (20) “Old” ADSs surrendered for cancellation.

This ratio change does not affect any of the RBS Preferred share ADS programmes.”

Before this reverse split the ratio between an ordinary share and an ADR share was 1:1.

ADR Share Price Calculation:
Friday closing price of 1 London-listed RBS ordinary share = 64.0 p
At an exchange rate of 1 British Pound = 1.56911 $, 1 RBS ordinary share = 1.00465$

So with the Reverse Split: 1 ADR = 20 ordinary shares
That means 1 ADR must trade for: 20 * 1.00465 = $20.09

However RBS closed at $19.28 Friday in New York.One reason may be that the market does not believe this reverse split will have a positive effect on the stock.

As part of the British Government’s 37 billion pounds rescue plan announced last month, RBS will boost its capital by 20 billion pounds by turning over control to the government. The government will get 5 billion pounds of preferred shares and common shares for the remaining 15 billion pounds. As a condition for accepting the government cash infusion, RBS has agreed not to pay a cash dividend as well until 2010.

Despite the above cash infusion, many institutional and individual investors may not touch RBS due to many unknowns faced by the bank and the banking industry in general. Also on November 4, 2008 RBS warned “it will be hit by more writedowns and rising bad debts this quarter as its incoming chief executive kick-started a strategy overhaul aiming to restart dividends in 2010″ and added that “it expects losses on bad loans to continue to rise as a worsening economy and tough financial markets feed through to consumers and businesses”

Only time will tell if the reverse split will be successful or not in the long run.

Disclosure: Long RBS

Comments

[Vobogeck:]

This is a no-brainer. Arbitragers will ensure that the ADR will always trade at the ADR ratio (now 20, previously 1) times the London price, adjusted for "friction" caused by ADR fees and exchange rate fluctuations.

2008 Nov 10 04:05 PM

[Ed Samiljan:]

So, what happens to divdend from preferred stock?

2008 Nov 11 11:39 AM

[David Hunkar:]

Xdividends
From what I know, I think they will pay the dividend for preferred stock. For more info, checkout their IR site:

www.investors.rbs.com/...

-David

2008 Nov 12 12:26 AM

[OldFriend:]

So what happens if say after the conversion, I should get 95.35 share of stock, what happens to my 0.35 fractional share (i.e. the fractional part corresponding to 7 of the old shares) - because my brokerage account (Scottrade) seems to have not accounted for it last time I checked

2008 Nov 13 04:34 PM

[David Hunkar:]

Oldfriend
You will get cash credited to your account for fractional shares.My broker did this in my account.

-David

2008 Nov 14 10:07 PM

[J-Rad:]

Is now a good time to invest in rbs in hopes of big payoffs years down the line??

2008 Nov 17 03:54 PM

[a Buongiorn...:]

I bought 100shares of RBS at 1.19. Now I have 5 after the split. Does this mean my position is worht 100 x the share price of day I decide to sell. Any comments or answers out there?

Apr 28 08:38 PM

[a Buongiorn...:]

Sure hope so as I bought it right before it split latter part of 2008. So far share price is going up. On a wait and see.......????

Aug 02 09:16 AM

[stink726:]

Your original basis was $119.00/100 or $1.19 a share. Your new basis is $119.00/5 or $23.80 per share. You only have 5 shares to sell now, after the reverse split, if I understood the question.


On Apr 28 08:38 PM a Buongiorno from Texas wrote:

> I bought 100shares of RBS at 1.19. Now I have 5 after the split.
> Does this mean my position is worht 100 x the share price of day
> I decide to sell. Any comments or answers out there?

Aug 19 04:05 PM