LONDON Royal Bank of Scotland is set to raise cash from its shareholders next week, an industry source said, in a move which analysts believe could raise over $20 billion and lead to similar action by other UK banks.
The rights issue, which could be Europe's biggest ever, would be radical a u-turn for Britain's second-largest bank and the first major capital hike for a British lender since the start of the credit crunch.
Analysts and shareholders said RBS Chief Executive Fred Goodwin might struggle to survive such a move, as it would underscore how ill-timed his decision was last year to lead a 71-billion-euro ($112 billion) takeover of Dutch bank ABN AMRO.
But they said a cash call, which would follow emergency fundraisings by major banks including Merrill Lynch and UBS, could also raise hopes that banks are getting to grips with a credit crisis which has led them to rein in lending, with painful consequences for the global economy.
"It is right that these major banks should be taking a lead in raising new equity and rebuilding confidence," Richard Lambert, director-general of the Confederation of British Industry said in a speech in Edinburgh, Scotland.
At 8:40 a.m. EDT, banks were the best performing sector on Europe's equity markets, up 2.7 percent. RBS stock, which has dropped 18 percent so far this year, was up 2.2 percent at 374 pence.
RBS said in a statement on Friday that it noted speculation about "a possible rights issue", but gave no further comment. It is due to publish an update on its trading performance and capital on Wednesday, to coincide with its shareholder meeting.
The source, who has direct knowledge of the matter, said the rights issue could coincide with a British government plan to ease tensions in the mortgage market due as early as next week.
The move to shore up their balance sheet, analysts said, could in fact be a condition imposed by UK authorities before they agreed to step in to boost liquidity in the market.
"It is something of u-turn for Fred Goodwin. The fact that he has changed his mind so quickly would suggest there has been meddling from elements within the tripartite authority," Exane BNP Paribas analyst James Eden said, referring to UK regulators.
If the government plan, expected to allow banks to swap mortgage-based securities temporarily for government bonds, is behind RBS's about-turn, other banks could follow -- despite concerns of rekindling memories of unpopular emergency rights issues by Barclays in the 1980s after big writedowns.
OTHERS TO FOLLOW?
RBS has so far suffered a relatively modest $3.2 billion writedown from toxic assets, but it bears the scars of recent market turmoil and its balance sheet has been stretched by its leading role in the takeover and break-up of ABN AMRO last year.
"Broadly speaking, I think it would be a good thing," said Edward Collins, a fund manager at New Star Asset Management who owns RBS shares.
"But (Fred Goodwin) is going to have to explain the reasoning. He's been emphatic it wasn't going to happen and this calls into question some of the assumptions they made when they did the ABN deal, albeit under different market conditions."
RBS now has some of the weakest capital ratios among European banks, with a core Tier 1 ratio of 4.5 percent at the end of 2007, well below the UK sector's 5.8 percent average, and seen as a key reason for its share price underperformance against rivals.
Analysts say Barclays, with a core Tier 1 capital ratio of 5.1 at the end of last year, and HBOS, also hit by the falling property market, are the next most thinly-capitalized banks.
Both banks declined to comment on Friday.
"From a UK economy point of view, the option of doing nothing by the UK banks is clearly no longer feasible," JP Morgan analysts said in a note.
Analysts said the key to RBS's success now lies in the mechanism, price and size of the rights issue -- with estimates rising well above 13 billion pounds ($26 billion) -- and whether it will be accompanied by a further writedown of risky assets.
Shares in Swiss giant UBS suffered after an initial capital raising was not seen as going far enough, and then jumped when it unveiled a second rights issue and doubled its asset writedowns to $37 billion -- on hopes the bank was finally getting to grips with all of its problems.
One exit route for RBS could involve following UBS down the road to a scrip dividend and back that with asset sales, long seen as more likely, but the bank has said it will not be pushed into firesales.
The bank is already considering the sale of train leasing business Angel Trains, which could fetch over 3 billion pounds. In more radical moves, it could sell its stake in Bank of China , its insurance unit or even U.S. arm Citizens -- all of which would go against previous strategy.
Goldman Sachs and Merrill Lynch are arranging the RBS rights issue, a source familiar with the situation said.
(Additional reporting by Mark Potter; Editing by Paul Bolding, Jason Neely)