Royal Bank of Scotland: ready for another takeover!
Forget 200p a share, what exactly is the price of the Royal Bank of Scotland rights issue? Might it be that the regulators have given the bank the capital to rescue its weaker brethren?
There has been much negotiation between the Edinburgh bank, the Bank of England and the regulators to ensure the record £12m share issue gets away smoothly. We know part of the price of the package is the £50bn the Treasury is providing to the Bank to kick-start lending by banks like Royal. We know Royal has made the symbolic gesture of paying its next dividend in paper not cash – and paying less. We may find that heads rolling at Royal follow – but don’t bank on it.
But might it be that the authorities have boosted Royal’s capital base so much so that it can be arm-twisted to takeover other banks hit by the credit crunch? Only half the £12bn is necessary to fill Royal’s black hole: the rest enhances its ratios but a billion or two could easily be diverted to bailing out a bank in need.
Royal can now be put under pressure to do the sort of rescue Lloyds TSB considered with Northern Rock but retreated from. It need not be a bank requiring rescue, however: the Bank would like to see consolidation of the sort of small player vulnerable to the crunch rather than see them suffer in public.
Royal’s rights paves the way for other big banks to raise capital but the smaller ones may find the queue closed before they can join. A takeover by one of the big banks would solve their problem: Royal’s issue is large enough to provide capital for itself and a smaller rival.
Buying a solvent bank such as Alliance & Leicester could cost about £2bn – Bradford & Bingley half that – making little dent in Royal’s cash windfall but it can use its enhanced capital ratios and market clout to help the smaller lender.
Given that Royal’s ABN Amro takeover got it into this mess, another bid might seem ironic, but the big bank gains by buying market share. The management hassle of absorbing a rival may be seen as part of the punishment for needing the authorities’ aid in refinancing now – and keeping Royal’s senior directors on to do that job may be another part of the penalty.
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April 23rd, 2008 at 11:27 am
For a contrarian anything goes
but in this fantasy surely we are forgetting the little matter of RBS’s shareholders?
I doubt Charlotte Square will think this squib at all funny - Nor will they let RBS
Board buy anybody. And they dont have to kow-tow to the government or anybody
else.
April 24th, 2008 at 10:30 am
Always fun to kick ideas about, but in the short-term I think that scenario is pretty unlikely. The Bank of England’s liquidity provision makes it more likely that rivals will survive for now, not less, in my view.
The possible exception are small building societies, but I’m yet to be convinced they’re really stretched anyway (stretched in terms of their ability to do business due to the need to horde cash, but not their underlying business).
In the long-term, I’m sure we’ll see more consolidation, however. This whole episode will mean more regulation, which will inevitable favour the incumbents.
April 24th, 2008 at 11:15 am
The mortgage lenders’ problem is not only lack of cash to lend but lack of borrowers wanting to buy property that is falling in value.
It is a circular argument (lack of demand from buyers depresses prices) but if the lenders suffer a big fall in business, that piles their overhead onto a smaller base - and that will hit specialist mortgage lenders, making merger or takeover attractive if not essential.
The obvious buyers will be well-capitalised generalist lenders who want to widen their customer base while spreading their own mortgage departments’ overheads. Banks that have raised more in rights issues than they need - and which possibly owe the regulators a favour - fit that bill perfectly.