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The RBS debacle may just be the first

by Tom Sieber

Speculation is mounting that both Barclays and HBOS may be forced to consider a rights issue in the wake of a similar move at the Royal Bank of Scotland.

RBS announced this week that it was seeking to raise £12 billion to strengthen a balance sheet severely stretched by the record-breaking acquisition of ABN Amro and a £5.9 billion credit crunch-related write-down.

The theory is that a write-down of a similar scale from Barclays would prompt a rights issue there. Alex Potter, banking analyst at Collins Stewart, explains the potential scenario: ‘Using an arguably simplistic analysis, Barclays’ £1.6 billion year-end write-downs could inflate to over £6 billion, which would be a level sufficient to trigger a rights issue.’

Potter believes the group’s Tier 1 capital ratio, a key measure of the bank’s capital adequacy, would be too low, and that more than £8 billion would be required to recapitalise itself. HBOS is another potential source of concern as its capital position is similarly under pressure.

A read across from RBS does not bode well for the UK’s leading mortgage lender. RBS took a £666 million pre-tax write-down against its Alt-A portfolio, a classification of mortgages where the risk profile falls between prime and sub-prime – HBOS is yet to announce any write-down of its Alt-A.

Returning to Barclays, in relative terms the stock has performed well in recent weeks and while Potter remains a long-term buyer, due to the shadow cast by what has happened with RBS he advises taking profits in the short term.

It will be interesting to see if investors heed this advice. The latest research report from Capita Registrars suggests that private investors have been quite savvy in their recent trading of the banks.

According to the report they reversed December and January’s £300 million of net sales of financials stocks, buying back £340 million in February and March just prior to the recent rally.

John Roundhill, director of Capita, explains: ‘The bipolar nature of the market is epitomised in the financials sector. It seems, with the results season out of the way, private investors breathed a collective sigh of relief.

‘But this is still a relatively modest reinvestment in the context of the £3 billion of financials shares they had dumped since October 2006. This looks like opportunistic short-term trading, rather than a long-term strategy to rebuild their holdings.

‘Reports of a weak ISA sales season reinforce the notion that private investors are using direct trading as a short-term tactic.