HBOS cannot bank on the success of rival rights issue

Published on Sunday 8 June 2008 21:55

CITY sources warned last night that the expected around 95 per cent take-up of Royal Bank of Scotland's rights issue this morning was not automatically good news for rival HBOS's £4 billion cash call on shareholders.

It is understood that RBS avoided a humiliating rump of new shares in its 12bn record offer being left with disenchanted shareholders at last Friday's 11am deadline.

RBS will formally announce the results of the issue to the Stock Exchange sometime after 7am today. However, City analysts and fund managers said yesterday that the differences between the two banks' shareholder bases made a direct "readacross" from the two cash calls difficult.

They say RBS is dominated by big institutional shareholders, awash with cash, who tend to support management in the majority of such cases.

By contrast, HBOS, the Halifax/Bank of Scotland banking giant, has two million private shareholders, the biggest non-institutional shareholder base in the UK.

It is thought it is a harder decision for private investors to take up their rights because of the strains on their disposable income in the tightening economic climate. One fund manager said: "The average punter will have less spare cash in their pocket than the institutions in the current tough state of the economy.

"That army of small shareholders may feel less inclined to throw more money in to take up their rights, particularly when they are reading daily about the apparently parlous state of the banking sector."

Alex Potter, banking analyst at broker Collins Stewart, agreed that the two banks had "very different shareholder bases".

Potter added: "But there is another factor, I think, why you cannot necessarily read too much into HBOS's rights issue from what is being said has happened at RBS.

"RBS has made a stronger case for the cash call. They were under-capitalised post the ABN Amro acquisition, they said sorry, and now they are trying to rectify it.

"But the HBOS cash call has never really been that wellexplained. They were not desperately short of capital and had not done a big takeover deal.

"The risk is that the reason for its rights was that they were simply terrified by a UK bad debt cycle developing."

HBOS said last Wednesday that the deadline for its army of small investors to take up new shares was 18 July. On average, retail investors own 374 shares, so will be asked for 410 to prevent dilution of their stake.

One source said: "It is clear that if RBS's share offer had been badly received, it would have been catastrophic for HBOS.

Andy (Hornby, HBOS's chief executive] will breathe a sigh of relief this morning if the optimistic noises on the RBS rights issue are proved true."

A successful rights take up at RBS is also expected to reduce some of the pressure on chief executive Sir Fred Goodwin and chairman Sir Tom McKillop.

The duo have been criticised for pressing ahead with buying ABN at a top of the market price last summer, despite the onset of the credit crunch.

In addition, the RBS board was denying it needed recapitalisation within a couple of months of launching the cash call on investors in late-April.