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RBS announces £12 billion share issue strategy

Royal Bank of Scotland (RBS) announced yesterday a record share issue of £12 billion (US$23.77 billion) to shore up its finances after huge asset writedowns and acquisition of ABN Amro bank.

The new shares would be made available to existing shareholders at 46.3 percent below the closing price of RBS stock on Friday of 372.5 pence per share, the bank said.

The bank said that it would have to make further asset writedowns of £4.3 billion, or £5.9 billion before tax, arising from the credit crisis and resulting turbulence on financial markets.

It would also sell some assets and warned the dividends would be diluted in the short term.

“The proposed rights issue will raise proceeds of £12.0 billion net of expenses,” the bank said in a statement.

RBS chairman Tom McKillop said: “This is a difficult time for the financial services industry and it has presented us with specific challenges. Central to these has been the question of our capital ratios, which have been the focus of much attention, both internal and external, over recent months.”

“The overall underlying performance of the group has remained satisfactory with the principal exception of a slowdown in capital markets activity in global banking and markets,” the bank said.

To achieve its targets for shareholder funds in relation to key categories of risk, the board had decided “with regret” that this had to be done via a share rights issue, the bank said in a statement.

RBS, the second-biggest British bank, said that the issue of new shares, the biggest-ever in the UK, had been entirely guaranteed by three banks, Goldman Sachs, Merrill Lynch and UBS.

The issue would be made on the basis of 11 new shares for 18 shares held at a price of 200 pence per share.

“Following the rights issue, RBS believes that it will be in a strong position to realize the substantial value in its United Kingdom and international franchises and to take advantage of the growth opportunities available to it,” the bank said.

The bank, which is based in Scotland, also said it would sell some non-strategic assets including all of part of its insurance activities to raise a further amount of 4 billion euros after tax by the end of the year.

The measures were intended to raise the ratio of “core tier-one” shareholders’ funds to more than 6 percent from 4 percent.

The bank said “the 2007 dividend payout ratio of around 45 percent remains sustainable over the medium-term, given the strength and diversity of the group. The board will assess future dividends based on circumstances at the time.”

“It should be noted that the capital raised in the rights issue is not expected to generate the same return as existing capital in the business,” it said.

“This effect alone is likely to result in a reduction in dividend per share in 2008, after taking into account an adjustment in respect of the bonus element of the rights issue,” the bank said.
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