RBS investors get the capital ratio message

Published on Wednesday 14 May 2008 21:44

WHO would be a shareholder these days? It'll soon be worse than the end-of-August throng of aspiring actors drumming up business on the Royal Mile for their one-man Fringe shows. Companies are pleading: "Please, will you come to my rights issue?"

Of course, they are asking for you to pay more than the average struggling artist charges for their unique interpretation of Beckett's oeuvre. But then the plcs return something more tangible than an evening's entertainment. When times are good they pay their thanks in cash. But when times aren't so good the shareholders start to look a little more like an easy mark – the board of directors takes a bet that if they paid out once for shares they may well pay out again.

It is true shareholders are not often the subject of pity among the general populace. The first rule of dabbling in the markets is caveat emptor. Shareholders should know that the value of their shares can go down as well as up.

When it comes to a rights issue, they all have the option of not coughing up, and they can even realise a benefit on the sale of their rights to the new shares. But if they don't take up their rights, their share of the company becomes diluted, and they forgo some of the future dividends. Disappointing if it causes one to have to make an adjustment to one's annual Cognac budget. But worrisome if it causes pensioners reliant on a little pile of dividends to tied them over to Christmas.

As one of the shareholders at RBS's general meeting yesterday pointed out: "Similar to the revered financial institutions, in the current economic climate I am currently experiencing liquidity problems in relation to the funds required to take up the rights issue."

He wasn't just making a wry point on the banks' seeming failure to manage their own affairs; he was actually skint and asking the chairman if he would be making provision, a bridging loan perhaps, for those who simply could not scrape up the cash at the given time.

Of course this is not something the company seeking a rights issue has to worry much about. They've paid very, very good money for someone else to underwrite the share issue. At RBS it is that trinity of Goldman Sachs, Merrill Lynch and UBS. Bank of Scotland has Dresdner and Morgan Stanley. If the old codgers can't afford it, the underwriters know someone who can.

The fear and the anger was very clear at the RBS meeting yesterday. The bank won its share issue by an easy five billion votes of course – nothing anyone showing up at the serenely landscaped RBS conference centre did or said would have changed that outcome. Most of these are the institutions – still representing pensioners' interests but with the professional ennui of one who recognises a necessary annoyance.

But if you look at the ones who said no, about 4 per cent, or the ones who bothered to withhold their vote, you are looking at the protest of the individual shareholder. And although it can be easy to dismiss those attending shareholders' meetings of global institutions as cranks or just there for the tea and biscuits, they give the boards of banking conglomerates a dose of reality.

They were looking for reassurances – that this, that the largest rights issue in banking history wouldn't happen again. Wisely, chairman Sir Tom McKillop resisted the temptation to give that reassurance. He said the board had been very thorough and tougher on writedowns that many others. But guarantees? In this climate? Don't be daft.

Perhaps shareholders were nave to ask. But there was definitely a sense that they wanted to see some of their pain reflected on the board, even a little blood perhaps. Where are the resignations, asked another shareholder, when you are squeezing shareholders to replace cash you lost?

Here McKillop got a little more animated. It is easy to truck out the pat answers in a room full of crotchety shareholders – the "no we can't cut directors' pay because we need to hire and keep the best talent" had already been uttered. Instead McKillop reminded them that this rights issue is not happening because the bank has to write down capital by 4.3bn. Oh no. That will be taken care of by the 4bn they expect, hope, to raise by flogging their insurance companies. He nonchalantly added that they had planned to sell Churchill and Direct Line even before the trouble happened. No, the new 12bn being raised is to shore up RBS's capital ratios. "It is quite wrong to say the 12bn is being used to fill the hole," McKillop admonished.

As each new firm launching plans for a rights issue joins a lengthening queue, you get the feeling that this might become a popular refrain: "It's not the writedowns, it is the capital ratios."

There was nothing else that could be done. Even if they didn't like it, the shareholders realise that some pain in the short term is preferable to the alternative – a sell-off, or some other disaster that wasn't going to make their retirement any more comfortable.

You can expect more of the same when HBOS enacts its own drama at its extraordinary general meeting in June.

HBOS's 2.1 million independent shareholders, the largest proportion of any company in the UK, will also be asking where their money is being spent.