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Wednesday 15 October 2008

Hand over your cash: how banks are mugging investors

Neil Collins says the rights issues recently announced by RBS, Bradford & Bingley and HBOS are a sign of desperation — and their terms are an insult to loyal shareholders

Within the next few days, half a million savers with the former Halifax Building Society will receive a fat, bewildering and highly complex document. It will invite them to buy more shares in HBOS, the company that now owns Halifax after its merger with Bank of Scotland, at what at first glance seems a highly attractive price. If they also happen to be shareholders in Royal Bank of Scotland, they’ll have received a matching batch of gobbledegook from it too.

Between them, these banks are asking their shareholders for £16 billion, although ‘asking’ in this context is rather like the bank teller being asked to hand over the till’s contents by a masked man with a sawn-off shotgun. Shareholders who ignore the offers will find themselves worse off as a result.

HBOS and RBS made their announcements a little while ago. Last week was slightly less expensive for hapless holders of bank shares. Bradford & Bingley, low in the second division of this industry, went for £300 million, a comparatively modest sum, but the maximum the market would bear. Barclays, which issued a routine trading update, passed up its chance, prompting one analyst to send out a memo headed ‘In denial’.

These are rights issues. They are a well-established method for raising new capital from shareholders. But as we shall see, these banks have given them a novel twist at shareholders’ expense. RBS is, as it were, the Big Issue seller, asking for your spare £12 billion, easily a record, and the sob story that accompanies it is a fine demonstration of how hubris is so often followed by nemesis.

Last year RBS gatecrashed the merger party Barclays had organised with the Dutch bank ABN Amro. Barclays proposed to pay with shares, but RBS came in with cash, supported by a couple of heavies, Fortis of Belgium and Santander of Spain. Long before this bid reached the point of no return, it looked like a big mistake to outsiders. Its one obvious attraction was ABN’s American bank, LaSalle, which fitted neatly into Royal Bank’s jigsaw of acquisitions in the US north-east, but ABN sold it before RBS could stop them. Nevertheless, the bid went ahead, in rapidly deteriorating credit conditions, on the thin justification that ABN’s wholesale bank would be rammed into RBS’s amid a shower of efficiency gains.

More articles from: Neil Collins | this section

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