RBS and HBoS in crisis: Banking giants take stock market battering

Published on Monday 6 October 2008 09:54

THE Capital's two banking giants took a battering on the stock market today as their shares continued to nosedive.

For most of the day, attention was focused on Royal Bank of Scotland as its share price plummeted, closing at only 90p - a fall of 39 per cent over the course of the day - wiping around 8 billion off its market value.

But a dramatic late fall saw HBoS fare even worse, losing 42 per cent of its value on one day, to close at just 94p. Lloyds TSB was down 13 per cent.

Tonight, Chancellor Alistair Darling said he will announce a comprehensive rescue package for the embattled banks tomorrow morning.

Following crisis talks with Bank of England Governor Mervyn King and Financial Services Authority chairman Lord Turner, Mr Darling said he would release full details before markets open tomorrow morning.

"The Bank of England has been putting substantial sums into the market today and it is ready to do more when that is needed," he said in a brief holding statement.

"We have been working closely with the Governor of the Bank of England, the Financial Services Authority and financial institutions to put banks on a longer term sound footing.

"I intend to make a statement before the markets open tomorrow morning and I will be making a further statement to the House of Commons later in the day."

RBS saw it's shares plummet following reports this morning that Sir Fred Goodwin and other leading bankers had asked the Chancellor for a 50 billion rescue package.

The Royal Bank today categorically denied making any such request but was uonly able to do so after seeing shares tumble at one stage by 40 per cent.

The stock market turmoil - which also affected Lloyds TSB and Barclays - came as a further blow to the Royal Bank after the ratings agency Standard & Poor downgraded the bank meaning they now regard it a less safe institution to lend to.

The shares price plunge came after details of a conference call last night between Chancellor Alistair Darling, banking chiefs, Mervyn King and Adair Turner started to emerge.

BBC Business Editor Robert Peston ran it on his blog early this morning after Treasury officials apparently began briefing the media.

It was then picked up by the main news bulletins sparking the mass sell-off amid fears some of the biggest high street banks may be effectively part-nationalised.

The bank tried to calm nerves by issuing a statement early this afternoon refuting claims the company, along with Lloyds TSB and Barclays, want up to 15 billion each of new capital fro the Government. The one-line statement said simply: "Contrary to press speculation, RBS did not make a request to Government for capital."

Today's events saw Alistair Darling coming under renewed fire for allegedly fuelling market concerns by "dithering".

Bryan Johnston, senior divisional director at Bell Lawrie, said: "What we need is resolute government and resolute decision-making and what we have got is Alistair Darling, which is a shame."

Sandy Chen, banking analyst at Panmure Gordon, said there are mounting concerns with RBS and Barclays over potential massive exposure to defaults on complex financial instruments.

He added: "Regarding the reported UK bank recapitalisation programme, any Government injection of fresh equity would obviously dilute existing shareholders. And given their potential exposures to credit default swap counterparty defaults, we again highlight Barclays and RBS as our key 'sells'."

According to some reports, he is still looking to give the go-ahead to the recapitalisation plan for the banks within a week.

Vince Cable, the Liberal Democrat treasury spokesman, said: 'The Government must come clean on its plans very quickly, otherwise continued uncertainty will force more banks to the wall.

'We're effectively talking about part-nationalisation, and there is no point in trying to conceal that. It is much more sensible to deal with this pro-actively, rather than through a succession of collapses like those of Bradford & Bingley or Northern Rock.'

BANKING GIANT ONE OF THE WORST AFFECTED

Royal Bank of Scotland has been one of the worst affected of the UK banking giants by the crisis in credit markets.

Hefty write-downs and an ill-timed takeover of Dutch bank ABN Amro saw the group forced to ask shareholders for 12 billion earlier this year – the biggest rights issue in UK corporate history.

It then announced its first loss in 40 years as it unveiled first half figures, but moved to assure investors that its fundraising efforts had sufficiently strengthened its finances.

Concerns over the group have continued to dog Royal Bank of Scotland (RBS), with today's share price fall coming on top of a 61 per cent plunge in stock value since the beginning of the year.

The UK's second biggest bank, which also owns NatWest, yesterday saw its troubles compounded further when credit ratings agency Standard & Poor's cut its rating on the firm amid fears over its future earnings and write-downs.

The move effectively means that RBS is now deemed a less safe institution to lend money to, which is set to make it even more difficult for the bank to secure funds at a time when interbank lending has already all but frozen.

RBS bosses have come under heavy fire for their part in the bank's woes, which drove the need to tap shareholders for such a large sum.

Chief executive Sir Fred Goodwin was forced to assure investors that he remained the best man for the job as he unveiled pre-tax losses of 691 million in the first half of the year.

It wrote down 5.9 billion from the credit crunch in the six month period alone, coming on top of billions of losses from the financial turmoil and US sub-prime mortgage market last year.

A large chunk of the financial hit also came from ABN, acquired for nearly 50 billion as part of a consortium of banks, led by RBS.

Not only has ABN contributed to the bank's write-downs, but the cost of the deal knocked RBS's balance sheet.

The takeover was agreed at the height of the market just before the credit crunch struck, with the price now looking excessive given the share falls since in the banking sector.

One of its partners in the ABN takeover – Belgium bank Fortis – has since had to be part-nationalised and broken up largely after it ran into trouble with costs associated with integrating RBS.

Fortis paid 24 billion euros (19bn) for its share of ABN, but the stake was sold at a 63% discount to the Dutch Government under the rescue deal.

RBS is also thought to be facing difficulties integrating its portion of ABN without having to make more big write-offs.

Meanwhile the bank is reportedly struggling to find buyers for its Churchill Insurance and Direct Line businesses, put up for sale in April.

It is hoping to further boost capital reserved by offloading the firms, but at around 7 billion, the price tag is seen as being too high for many in the current market.

And amid the funding fears, there are also concerns among analysts that RBS has large exposures to more toxic credit derivatives, with the potential for default claims by creditors of Lehman Brothers and US mortgage groups Freddie Mac and Fannie Mae.

Settlement auctions of the amount that must be paid out to these creditors is being determined this week, the results of which are being closely watched by the market for its implication on banks such as RBS.

But RBS's own assessment of its capital strength was fairly bullish in its most recent update.

It said on unveiling half-year figures in August that it was "comfortable" with the level of write-downs announced.

And it said its capital ratios – which measure how strong the balance sheet is – were ahead of target thanks to the 12.1 billion rights issue.

The bank's core Tier 1 ratio was 5.7 per cent, compared with a 5 per cent target, and Sir Fred said he hoped to see it rise to 6 per cent by the year end.

But recent events are expected to have taken its toll since these relatively upbeat comments, and investors are fretting over what further funding troubles and write-downs may lay in store for RBS.

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