- BofA On Proposed Changes In The Housing Bailout Program
- The Future of The Media Landscape
- November Auto Sales Muddle Along
- Busch: What Obama Won't Say Tonight
- Stick with Equities—Avoid Emerging Markets: Laszlo Birinyi
- Pfizer Chomps On A Carrot
- Predictions 2010: Technology
- Predictions 2010: Consumers
- Predictions 2010: The Big Picture
- Who Were the Biggest Winners And Losers This Year?
- GE, Comcast Complete Deal Over NBC Universal: Source
- US May Raise Rates Before Jobs Recover: Fed's Plosser
- Stocks Likely Don't Need Santa to Keep Rally Going
- Larry Kudlow's Open Letter to Tiger Woods
- AIG Slashes US Debt Under Deal With New York Fed
- Commercial Property Fears Are Overblown: Zell, LeFrak
- Trump: Time to Force Banks to Start Lending
- Seamstress Fined $5.7 Million for Insider Trading
MOST SHARED
- GE, Comcast Complete Deal Over NBC Universal: Source
- Retailers 'Friend' Facebook as Marketing Budgets Shrink
- Predictions 2010: Technology
- Pending Home Sales Have Record Rise; Construction Flat
- GE, Comcast Will Both Benefit From NBCU Deal: Analysts
- US May Raise Rates Before Jobs Recover: Fed's Plosser
- CNBC's Winners & Losers of 2009 Results
- Predictions 2010: Media
Text Size 
Nobody should be surprised by the talk about a cash-raising exercise at RBS. The real question is why it is taking so long for the banks to acknowledge the continued deterioration in the quality of the assets they own.
 |
AP |
Market guesstimates suggest RBS will be looking for something around 10 billion pounds ($20 billion). Very much less than that would invite concerns that a further cash call might be needed. So how should current shareholders respond?
Raising cash from shareholders is always painful. They either pay up or see their holdings diluted. Either way the shareholders suffer. Given RBS' share price has halved in the last year, the owners of this business have already been financially damaged. But we are where we are.
Any decision to take up a rights issue should be based on a fresh examination of the business opportunity for RBS. Treat this decision like any other argument for investing in one asset class over another or one stock in preference for another.
The rub is what the banks' business model will look like from here? The credit crisis is challenging the idea that banks will be able to get back to the business of lending at pre-crunch levels. RBS' share price has to rise 100 percent to return to its pre-crisis levels (and the level some investors would have bought). Does that appear feasible in an environment of slower economic growth where consumers are likely to reign in spending habits?
RBS is not an investment bank, and has therefore missed the worst excesses of the CDO and asset-backed debt market problems. However, Sir Fred Goodwin and his team have been aggressively acquiring companies, with ABN just the latest, albeit one of the largest. New funds will be used to work through that acquisition and bolster existing wholesale and retail commitments.
Some argue shareholders who have enjoyed the profits in the good years should be prepared to add capital in the bad. Well fortunately it doesn't work like that. If this is a business with a bright future, shareholders with a diluted holding will still benefit. If it is not, then putting more money into the business is folly.
This is a far-from-clear-cut story about investing in growth and shareholders should think carefully about their next move. Any bank asking shareholders for money in this environment must be prepared to sweeten the deal with a deep discount to the current price. But even then, investors must ask basic questions about where the growth is going to come from.
Your feedback always welcome - here.
- Will the Fed raise rates? Will the dollar continue its slide? CNBC experts weigh in on the year ahead.
- Goldman Sachs has forbidden employees from gathering in private holiday parties of 12 or more.
- Do you have what it takes to run your own business? Ask yourself these questions.
- Heavily armed pirates in Somalia have set up a sort of stock exhange to fund their hijackings.
- A recent issue of ESPN Magazine was one of its top sellers ever, and it only took scantily clad athletes to make it happen.
- A famed author has written all his work on an old typewriter that is now up for auction. The NYT reports.
Data is a real-time snapshot *Data is delayed at least 15 minutes