RBS rights issue confirms Threadneedle stock views on banks

Leigh Harrison, Threadneedle Head of UK Equities comments: "Royal Bank of Scotland's £12bn rights issue comes as little surprise having been widely expected by analysts for some months and trailed extensively in the media in the last few weeks. Some of the details, however, make interesting reading. In particular, a third of the sum being raised is being set aside for sub-prime and related write downs. This suggests that further write downs and even fund raisings may occur elsewhere in the sector, with Barclays and HBOS the most widely predicted candidates. Estimates of around a further £10bn of share issuance are likely to overhang the sector for the time being."

"While RBS's issue raises its capital ratios out of the danger zone, especially if this is supplemented by the disposals proposed, the earnings outlook remains problematic. Uncertainty is high about future bad debt levels, volume growth and margins and any one of these could have a significant impact on earnings forecasts and future returns. Additionally, this week's Bank of England debt-for-bonds package is likely to ease the pressure in the interbank lending market which should be beneficial. However, we believe it is unlikely to have a significant impact on the availability of mortgage credit because confidence in the market is weakening. As the Governor of the Bank of England pointed out there is no intention or wish to recreate the lending conditions that prevailed in 2006 and early 2007. With these points in mind, even though the RBS issue comes at a large discount, our view is that the post rights issue valuation of the shares is not particularly attractive. We remain cautious on the UK economy and, on this basis, domestic consumer exposure is not something we are looking for in our bank holdings."

"Despite our lukewarm reaction to the BoE and RBS news we do, however, think there are opportunities in the UK banking sector and we are focusing on well capitalised companies with low exposure to sub-prime lending and/or significant Asian earnings such as Lloyds TSB, Standard Chartered and HSBC. In the current increasingly challenging economic environment we think that we are now in a more discriminating phase of the market in which investors will reward the winners whilst still avoiding the losers."