RBS: Sir Fred Slips

 Word of RBS's (RBS) surprise £12 billion capital raise isn't just a disappointing piece of news for shareholders; it caps a series of decisions by management over the past twelve months that can only be described as disastrous. Roughly this time last year, when its stock was trading at 700 pence, RBS and its bidding partners first considered putting together a bid for ABN Amro. In October, the consortium finally closed on £47 billion deal; the price was £10 billion above the next highest bid, and worked out to 20 times earnings. RBS's portion of the deal was £10 billion in cash. By this time, RBS's stock was down to 550p. The deal pushed down RBS's capital ratio to 4.25%, well below the 5.50% average for U.K. banks, and just 25 basis points above the minimum that causes regulatory bells to go off. Sir Fred Goodwin said that, no, the company need not raise capital to pay for the deal. It would rebuild its capital via retained earnings instead.

Then in December (with RBS by now trading in the low 400s) Sir Fred told investors again that the company would not raise new capital. Its subprime-related writedown would only be £1 billion, far lower than the hits that companies like Citigroup and Merrill Lynch took last quarter. He also noted that the company's operating results were running "well ahead of market consensus."

In February, Sir Fred raised RBS's dividend, and again reiterated the company didn't need to raise capital (“Not us! No way! Not now!”)

Never mind!  Now the stock is at 358p, and the new capital raise will be much more dilutive to shareholders than it would have been had the company acted earlier. And, of course, if Sir Fred had just stayed out of the ABN mess altogether, he wouldn't have to raise nearly as much as he is. RBS isn't the only bank to take a huge subprime-related hit, of course. But the moves the company have made has helped take a bad situation and make it astonishingly worse. 

Comments

[jpowalski]

RBS is a good drip stock now. Let's talk about it again in a few years, right now I'm really liking the dividend.