Why are people on here even arguing about these RBS Prefs any more? They are as safe or probably FAR SAFER than any other US bank Pref presently trading on the NYSE!
RBS has completely thrown out the kitchen sink with its £28 billion loss for 2008, and the new board are taking all the necessary steps to return to what will be very high profits. Look at Barclays today, announcing profits of well over £5 billion and good trading already for 2009. Any RBS future losses will also be covered 90% by the taxpayer, so we are talking about very limited losses after 2008.
The capital position is also now one of the strongest of any bank in the world, having raised £32 billion in core tier one equity in the last year, to give it one of the highest and safest capital levels of any bank in the world. Also, as can be seen from the above article, the UK has reduced capital ratios to 6% giving RBS even more room for safety.
Again, these RBS Prefs are safer than ANY OTHER bank Prefs on the NYSE.
The UK Government will also never nationalise any of the big 3 UK banks RBS, Lloyds or Barclays . They have stated this to the media on many, many occasions now and also if they were ever fully nationalised by this Labour Government, the following would all happen in very short order:
1) Sterling - down about 50% within a few days to about $0.70 US Dollars and about 0.50 Euros.
2) UK Treasury now immediately fully liable for all debts of nationalised banks adding several trillion or about 400% to National Debt.
3) UK Sovereign debt downgraded to A or even BBB by S&P, causing international investors, banks and companies to flee the country and the currency.
4) Interest rates soar to maybe 10% or higher as The Bank of England attempts to finance this massive amount of debt and sell Treasuries that no investors want.
5) Labour Party out of power for probably the next 20 years as the voters of Scotland hold them accountable for both the collapse of what were once their 2 greatest companies, RBS and Bank of Scotland, and also the massive unemployment in Scotland caused by their collapse.
6) The reputation of the City of London collapses as an international capitalist financial centre. Why do business in a Socialist country where the local Socialist government appropriates the assets of private shareholders? Even Russia would seem less risky.
7) Most City of London institutions move their operations and Head Offices
to better places such as Switzerland, Singapore or Hong Kong, where assets are safe, taxes are lower, and the Government does not nationalise or steal private assets.
8) Most UK and foreign multinational companies also decide to make a similar move out of the UK as world confidence in the UK economy and UK currency continues to collapse.
9) Labour seeks emergency help from IMF as National Debt and deficit soars and UK is no longer able to fund itself in the debt markets. IMF bails out the UK but imposes punishing terms and conditions relating to future public spending.
9) Public spending collapses to comply with IMF terms leading to the loss of perhaps 2 or 3 million public sector jobs.
10) Unemployment in UK approaches 6 million or 20% of UK workforce as the UK economy reaches Icelandic levels of collapse.
End Result? UK Economy completely collapses. Sterling collapses.
Last person to leave Britain, please turn the lights out as you are leaving Heathrow.
Nationalisation of any of the Big 3 Banks?
Not a chance!
RBS Prefs are safe. They have been mispriced by the market because of panic and fear, and will soon return to a yield nearer 10%.
In time they will also be repaid at $25 just like every other previous RBS Pref.
RexobXIP, If you were told that the major reason the Govs GBP 5b of Perfs were being converted to common was to increase the banks tier 1 capital position there may be some miscommunication, they told you what they wanted you to hear or the Gov perfs were not true perfs. Tier 1 capital for banks include the primary equity, cash reserves and/or irredeemable-by the holder-non-cummulative perf stock and retained earnings of that bank. Admittly, each country with a western style banking system has a banking regulator who has some limited discretion over how different financial instruments are positioned in the core capital structure.
Realistically, every article you read will refer to that all important If it falls below a certain ratio figure-which was recently lower by UK banking Regulater to I think 6-from 10-before the bank is considered insolvent. IMO it seems impossible to remove-convert to common-GBP 5b in tier 1 perfs without reducing that tier 1 capital account. The reasons why they did it IMO are complicated and more than just reducing the divi drain because in reality it reduces the ability to lend money which is based on the banks tier 1 capial ratio.
The tier 1 capital ratio is that of the banks core equity-tier 1 plus tier 2 capital to its total risk-weighted assets. In my mind you can't remove from tier 1 and increase that ratio. Perhaps there is something I am missing but, that is how I currently see it.
You are correct, the Govt is redeeming the preferreds for common in order to eliminate the mandatory payment and free up capital. While in the grand scheme the 600 million pound annual dividend isn't that much, they recognize that if RBS is paying that to the treasury, they aren't lending it. Which is a problem.
I think the issue facing RBS and preferred holders remains less whether they'll pay the dividend on the preferreds in March or not, and more will this bank be in a non-nationalized form after they get a handle on the 1Q results.
I own a variety of preferred shares and that remains my number one concern. If they don't pay in March, its disappointing, but in the grand scheme, I'll live. If they don't pay for a few quarters, but remain in this semi-independent...fine.
I just wonder if the the 4Q report is truly a kitchen sink moment. The 20 billion goodwill write-off from ABN AMRO does not qualify as the kitchen sink event some are portraying it as, and I'm concerned with the 8-9 billion in actual losses (yes, I know the retail unit did okay) and what else is left to be written down. If they are likely to ask for up to 100 billion pounds of bad assets to be insured by the Treasury, how much do they really think is non-performing?
Are you sure Re: Tier 1 capital ratio? I was explicitly told by RBS spokesperson that the conversion to ordinary was to raise the tier 1 capital, and free up cash.
Are they giving out bad info? I hope not.
FYI, I was concerned about the clause in the preferreds' prospectuses that stated the following:
"Dividends on the Series R preference shares in respect of a particular dividend payment date will not be declared and paid if (i) in its sole and absolute discretion, our board of directors resolves prior to the relevant dividend payment date that such dividend (or part thereof) shall not be declared and paid or (ii) in the opinion of the board of directors, payment of a dividend would breach or cause a breach of the capital adequacy requirements of the UK Financial Services Authority that apply at that time to us and/or any of our subsidiaries, or, subject to the next following paragraph, our distributable profits..."
So, in their sole and absolute discretion, the board can halt dividends. The board IS changing in its compostion soon, and with the government soon to own 70% of this entity, they will be "calling the shots" more than before. The government has decided not to, essentially, pay itself dividends in the future as they are converting their preference shares to common. This is what has spooked the market in the past week.
However, as long as there is capital adequacy and as long as there are "distributable profits", payment of preferred dividends may continue. The capital IS adequate as the Tier 1 ratios suggest. Then, the question is what comprises "distributable profits"? Do they even exist? This sentence from the IPO prospectus seems to answer that question....
"The UK Companies Act 1985 defines “distributable profits” as, in general terms, and subject to adjustment, accumulated realized profits less accumulated realized losses."
This is good news. And we should all recall that dividends were paid in December despite 3Q losses. So, by definition, dividends may be paid out of PAST profits that have accumulated on the balance sheet, as long as past accumulated profits are higher than accumulated losses.
They are. The book value of RBS is probably over 50 pences on 56 billion ordinary shares, proforma for the 2nd bailout. "Stress-tested", per Citi research, book value could be as low as 35 pence. But that's still about $27 billion of book value, which is nothing more than a representation of past accumulated NET profits.
Given that there IS book value, and that capital is more than adequate, there is no tangible reason for the board to halt dividends for the time being. Doing so would be an arbitrary and capricious act probably on the orders of the government. If you think the government wishes to maintain the integrity of the preferred and other capital markets, they would be very wise to leave the preferred dividends alone.
Can we trust the new board of directors to not succumb to government pressure, or not act in an arbitrary way? That is the bet I am making for the March quarter. I think the dividend will be declared, but this is not without risk due to the "sole and absolute discretion" language in the prospectus.
The March 2009 RBS Prefs dividend is already safe as the UK Gov Prefs will not be redeemed before then and all the RBS Prefs rank pari passu or equal with each other.
All the following RBS Pref dividends after then are also just as safe as any other Bank Prefs in the present environment.
Any RBS future losses are now capped at 10% and RBS tier one capital is now one of the safest and strongest in the world. How many other banks in the world can say that?
These RBS Prefs will be trading nearer to a 10% yield within a few weeks, so still 300% upside from here.
Well put...Great Summary...I agreed Nationalization is political and economic suicide!!! You deserve a star but, unfortunately I don't know how to give you one. Only negative thing I have come across lately is-and I really don't know how to explain it-is that my brokers are telling me that large blocks of prefs-40-50-60k blocks-were sold off on Friday. They feel "That the big boys know something we commoners don't". Outside that the only theory I can come up with is that some of funds and instutions that needed to keep income producing instruments in their portfolios were worried about prefs divi in future.
I agree with some of the things you say. Despite having raised 32b pounds capital and having what appear to be good capital ratios, remember that RBS started out with a weaker capital position that other large foreign banks and had leverage closer to Bear Stearns and Lehman than to Bank of America.
BUT, we did not know what was not on the balance sheets of the US financial institutions or the hidden leverage thru derivatives. Likewise I personally do not know what RBS still holds. Further, this economy has a lot more pain to inflict. We are at the beginning of comml real estate problems, not the end - and those are significant assets in the banking sector although I do not know bank by bank.
I think it neither slam dunk that everything works fine for the pfds, nor slam dunk that the pfds are toast. For the present I am optimistic about the pfds and believe nationalization is a desperate last resort which will be avoided unless it cannot be.
Would expect to see these RBS Prefs soar over the next few days as the market realises what is happening,
1) 90% of all future RBS losses to be covered by the UK taxpayers.
2) RBS Tier One Equity of nearly 10% now, making it one of the best capitalised banks the world now, having recently raised £32 billion in new equity.
3) UK has now reduced the capital requirement for banks to less than 6%, making RBS capital position even safer.
4) UK Government has said many times in recent weeks, there will be no possibility of nationalisation for RBS.
So, RBS Prefs are as safe or safer than any US bank now, and many of the other bank Prefs trade at less than 10% yield.
RBS Prefs yield is now almost 60%!!!
so look for a rise of about 400% over the next few days.