Royal Bank of Scotland on Monday announced a profit warning along with details of a £20bn capital raising and decision not to pay a dividend until it had repaid £5bn of preference shares being bought by the UK government.

The bank’s chairman, chief executive and head of global markets are also leaving and the government will have a say in appointing three new non-executive directors to the bank’s board.

As expected, RBS will issue £15bn worth of ordinary shares, with the UK treasury underwriting the issue at 65½p. If the government takes all the shares it will end up with a stake of about 57 per cent in the bank.

But Sir Tom McKillop, chairman, said he thought that was unlikely as, “I believe this is an excellent investment opportunity”. He said RBS would be one of the best capitalised banks in the world.

He admitted that “it is immensely regretful that we are coming to shareholders again”. In the summer the bank raised £12bn through a rights issue. He said “we certainly feel bad” that shareholders had lost considerable value.

The government is also subscribing to £5bn of preference shares paying a 12 per cent coupon. RBS said it aimed to repay those shares “as soon as possible” but could not give a time frame. Not paying a dividend on ordinary shares would save money as in 2007 the group paid £3bn to shareholders.

The bank has given a commitment to continue to lend to house buyers and small businesses at at least the same rate as it did in 2007.

Sir Fred Goodwin, chief executive, will stay until Stephen Hester, a non-executive of RBS and chief executive of British Land, is able to leave the property company and assume the job. Also going is Johnny Cameron, chairman of the bank’s global markets business. Sir Tom McKillop will leave after the annual meeting next April.

Sir Tom said the changes were a board decision and not forced by the government. The group said that directors who had been dismissed would receive “a severance package which is reasonable and perceived as fair”. No directors would get a bonus for 2008 or 2009.

As well as receiving no bonus for 2008, Sir Fred Goodwin has waived his entitlement to compensation for losing his job, including his profit sharing package. Under the terms of his contract he was entitled to 12 months notice and his base salary in 2007 was £1.29m.

Last year he also received a performance bonus of £2.86m after spearheading the bank’s successful bid for ABN Amro giving him a total pay package of £4.19m. The transfer value of his pension fund was £8.37m at December 31 2007, which would give him an annual pension of £579,000.

Mr Cameron received total remuneration in 2007 of £3.256m, including a bonus of £1.9m, while Sir Tom McKillop was paid £750,000.

Mr Hester said that RBS had “an exciting and positive future,” while Sir Fred said that Mr Hester had “the skill, the experience and the temperament to get the best out of the group”. He said he was “sad” to be leaving.

The bank said that the UK treasury would “work with the board” to select three new non-executive directors who would bring “relevant commercial experience and participate as appropriate in the principal committees of the board”.

RBS said the extra capital would put its capital ratios substantially in excess of its targets of 6 per cent for its core Tier One ratio and 7.5 to 8.5 per cent for its Tier One capital.

Existing shareholders and new institutional shareholders will be able to buy the ordinary equity being issued, but it is probable that the government will end up with a majority holding in the company.

Normal Takeover Panel rules, which would require a full bid for RBS, will be waived so long as shareholders approve the equity issue.

The bank said it would cut back its more risky activities in its global markets business and pursue a “significant downsizing of capital-intensive businesses.” Meanwhile it would continue to lend to small businesses, already having a 25 per cent share of the UK small and medium-sized enterprise sector. It also has a 17 per cent share of the mortgage market.

It said the troubles in financial markets made forecasting profits difficult, but that it expected profits to be below previous expectations. Further asset write-downs and impairment charges were likely in the fourth quarter, it said.

Guy Whittaker, finance director, said trading had continued in line with earlier trends until mid-September when there had been a “marked slowdown in parts or our business”.

RBS would continue its disposal programme, expected to raised about £4bn. Sir Fred said the group was in advanced talks with two buyers for its insurance business, and hoped that would be completed by the year end, but said: ”We’ll not count our chickens until they come home to roost.”

Get alerts on Tom McKillop when a new story is published

Copyright The Financial Times Limited 2022. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Comments have not been enabled for this article.

Follow the topics in this article