RBS eyes share issue to limit London's stake

Royal Bank of Scotland is considering a £3bn-£4bn ($4.9bn$6.5bn) share issue to reduce the stake it will hand to the government for joining its toxic assets insurance scheme.

Plans are "tentative" and Stephen Hester, RBS chief executive, is still "putting out feelers" about a "modest-sized" issue, a person familiar with the situation said. Such a move would see RBS join Lloyds Banking Group in scrambling to raise capital to limit the use of what banks involved in the government's asset protection scheme view as a costly "bad bank" programme.

RBS is due to issue about £19bn of non-voting B shares to the government as a fee for putting £325bn of toxic assets into the bad bank . That would increase the government's stake in RBS from 70 per cent to about 85 per cent.

However, after a stock market rally in which RBS's share price has more than doubled in six months, the bank hopes to raise cash from shareholders to fund part of this fee and limit the rise in the government's stake.

Shareholders are still nursing losses on the £12bn invested in RBS's rights issue at 200p per share last year before the government had to step in and support UK banks directly. RBS declined to comment.

Shares in RBS slumped as low as 10p in January but they have rebounded and closed at 56.3p on Friday, giving it a market capitalisation of about £32bn.

The struggling bank, which made a record loss of £24.1bn last year after being hit by the cost of acquiring ABN Amro just before the financial crisis, is also selling or running down £230bn of non-core assets as it shrinks its balance sheet. It also recently hired Rory Cullinan to head its non-core division and the asset protection scheme.

Lloyds, which is 43.5 per cent taxpayer owned, is considering alternatives to joining the asset protection scheme, including a rights issue and converting preference shares into equity.

Speculation about a possible Lloyds rights issue could have prompted RBS to consider a similar move to prove it can also raise cash from investors other than the government and to avoid falling behind its rival.

Some shareholders in Lloyds told the Financial Times last week that they would be prepared to back a rights issue of as much as £5bn on the basis that the government would not be expected to take up its share of the issue.