Overview: share issues

Rebuilding a balance sheet is not an easy job especially when it follows write-downs that run into billions of pounds. Unfortunately that’s the position finance directors of some UK banks find themselves in as they battle to come to terms with the credit crunch. The big issue will be whether they need to follow Royal Bank of Scotland and HBOS in selling more shares in a rights issue.

What’s happened?

The credit crunch has struck and the write- downs have followed. As a result of regulatory demands on capital sums, and the need to have decent working capital, two banks, RBS and HBOS, announced that they will each make a rights issue (sell more shares), £12bn in the case of RBS and £4bn for HBOS. There have been rumours that Barclays might also go the same way.

What will happen?

The issue has placed HBOS FD Mike Ellis and his counterpart at RBS, Guy Whittaker, at the heart of some of the biggest decisions they will face in their careers.

The RBS announcement was met with widespread criticism and calls for the
resignation of CEO Sir Fred Goodwin, while the youthful Andy Hornby, CEO at HBOS, has come under severe pressure ­ circumstances hardly likely to make their FDs feel entirely comfortable.

The FDs will have come under great strain to understand their respective balance sheets correctly, take into account capital needs and the demands of the fiendishly complex regulation in Basel II.

With the Barclays CEO saying firmly ‘not now’ to a rights issue, but clearly leaving the door ajar, his FD Chris Lucas is likely to be going through the same exercise.

And because a rights issue can increase investors’ exposure to the company, and potentially dilute shareholdings, the decision will have to be the right one to avoid public criticism and accusations of having to go ‘cap in hand’ to investors. HBOS have, ironically, faced accusations of ‘excessive prudence’ for their plans.

But the whole judgment rests on understanding that balance sheet and bank balance sheets are notoriously tricky.

On the assets side are mostly loans and investments, while the liabilities are all about deposits and borrowings. The FDs will have to be on top form to offer the right advice.

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