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Thursday 4 December 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

Hardly anyone outside the RBS citadel believed this modest prize justified the huge risk involved in paying out so much precious cash when every other bank was trying to conserve it. Yet RBS sailed on, seemingly oblivious to the storm. It even raised its final dividend, in what looked like a two-fingered gesture to the bears.

Well, they’ve had their picnic now, all right. The RBS rights issue is only one step short of a rescue. Shareholders are being offered 6,123,010,462 (count ’em) new shares in the ratio of 11 for every 18 owned, at 200p apiece. 200p! This bank’s management (slogan: ‘make it happen’) used to moan that their shares were cheap at thrice the price, and that the market just didn’t see what a brilliant lot they were. Now we can see that, far from being brilliant, they have destroyed shareholder value on a massive scale. The bank’s insurance businesses, Direct Line and Churchill, are up for sale. The dividend is being slashed even before the raised final has been paid, and to add confusion to insult, the next one will be paid in shares, a meaningless irritant which is presumably designed to cover the banker’s blushes and their now-desperate need to conserve cash.

Oh, sorry, I forgot. Bankers don’t do blushes. For another example, let us turn back to HBOS and its half-million small shareholders. They are being offered two new shares for every five they own, at 250p a time. Following the bad example of RBS, HBOS is also slashing the dividend and making the next payment in penny-packets of shares. For thousands of holders, these new ‘free’ shares will be about as valuable as points on a Tesco Reward card, and a lot harder to turn into something useful. If they feel they have been treated with contempt by their directors, they’re right.

The treatment could be costly, too. You may not have the money to buy the new shares, but if you ignore the cash call, your rights will be sold for whatever they will fetch. You’ll get a cheque — but beware, it will count as a partial disposal for tax pur-poses. The third way, of selling enough nil-paid rights shares to take up the balance (‘tail-swallowing’ in the jargon) maintains your investment, but is expensive in dealing costs for small shareholders.

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