Europe Preview: Will RBS's Grand Project Pay Off?

On Monday we will learn how successful Royal Bank of Scotland’s £12 billion rights issue has been. Toward the end of last week, it looked as if the banking giant could be heading into trouble as the group's shares traded toward the heavily discounted figure where rights issue had priced. The stock had lost over 25 percent since the cash call was announced and traded very close to the 200 pence a share offer.

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Fortunately, the stock rebounded this week to trade higher than 250 pence a share, meaning underwriters at Merrill Lynch , Goldman Sachs and UBS are unlikely to find themselves holding the stock no one wanted. Alex Potter at Collins Stewart says buying into the share sale makes sense given that RBS has not had to issue a profit warning. He says the bank has very little exposure to the UK buy-to-let mortgage market and has better risk management systems than a number of rivals. But I doubt Fred Goodwin will be reaching for the champagne just yet.

There may be relief among those holding RBS stock on Monday morning, and some hope that shares could begin to rally back to the 600 pence level seen early in the year. But the fact of the matter is a £1,000 investment in RBS on Jan. 1, 2007, would currently mean you were sitting on a £560 pound loss.

Collins Stewart may point to how RBS has stronger risk management than some of its rivals, but the problem for many shareholders is the lack of oversight over CEO Fred Goodwin. For some time, the banker known as "Fred the Shred" for his cost-cutting prowess has been responsible for the so-called "Goodwin discount." This is the term the City of London uses to describe why shares in RBS have traded at a discount to many of its peers across Europe.

The argument goes that Goodwin's aggressive M&A strategy of recent years has held back the bank's stock. The "victory" over Barclays for ABN Amro last year now looks like a deal too far for RBS. Barclays will admit they were lucky to lose out on a deal, given the credit crunch hit just months later, but it should not be forgotten that Barclays CEO John Varley thought the deal was a once-in-a-life time opportunity before losing out to Goodwin.

Goodwin is trying to raise capital and sell non-core assets in order to protect his grand project, which has seen a small Scottish bank turned into a global player. If the market improves and he can get the synergies he promised out of ABN, it's possible he'll be remembered as a visionary by the industry when shares rebound. But if the market gets worse and shares keep falling, then the grand project and Goodwin's legacy are likely to be seen a very different light.

© 2008 CNBC.com