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Thursday 4 December 2008

Any Other Business

The Chariots of Fire moment that revealed Gordon’s 10p tax timebomb

Rights issues by banks are often controversial, it must be said, because of two kinds of dilution effect: the one that leaves loyal shareholders owning smaller portions of the company if they do not take up their rights, and the one famously labelled here by Christopher Fildes as Sibley’s Law: ‘Giving capital to a bank is like giving a gallon of beer to a drunk,’ it begins, and Fildes fans will, I’m sure, be able to recite the rest by heart. Perhaps the most notorious example of its application was in 1988, when Barclays enraged shareholders by launching a deeply discounted rights issue to raise the then colossal sum of £924 million — how the City’s orders of magnitude have changed in 20 years — to fund expansion in the all-too-exciting areas of property lending and investment banking. The internal slogan for the campaign to persuade institutions to look favourably on the issue was ‘Number One by ’91’, which was later transmuted by City wags, with justification, to ‘In the poo by ’92’ and ‘On the floor by ’94’. But arguably there is some comfort for investors in subscribing to a rights issue such as RBS’s which is designed to fill an existing hole rather than to give the bankers the wherewithal to dig a new one and relieve themselves into it.

And as Michael Hughes — recently retired as chief investment officer of Baring Asset Management — explained to me, the shares of banks with broadly based business models (as opposed to pure mortgage-lenders, for example) are currently perceived by the City to be cheap, standing at a discount to their net asset values and offering yields well ahead of bond and cash rates. What’s more, raising new ‘Tier 1’ equity capital ‘can create a virtuous circle’ by reducing the banks’ day-to-day cost of funding and thereby boosting their profit margins. So I suspect institutional investors are not as offended by the RBS proposition as some media coverage has suggested and I’m betting on Fred to hang on to his job: he is, after all, best known for his skill in reviving banks with bad hangovers.

More articles from: Martin Vander Weyer | this section

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