AS THE directors of Royal Bank of Scotland shuffled from the stage at the Edinburgh conference centre last week, the sense of relief was palpable.
Sir Tom McKillop, the chairman, who had been forced to adopt the role of apologist for the board's
collective sins, escaped with a mauling from irate shareholders, while Sir Fred Goodwin, the chief executive who expected a lynch mob, was granted a pardon.
Amid much talk of learning from mistakes and correcting some of the more mischievous claims by their critics, such as the timing of the search for non-executive directors, McKillop was eager to get on with the task of rebuilding the balance sheet, helped, of course, by that £12bn pot of cash, and another £6bn–7bn if the bank finds a willing buyer for its insurance businesses.
McKillop, who was particularly animated by claims a day earlier that non-execs were being brought in as a response to the cash crisis, could still have one eye on stepping down. Sources say he may see through the new board appointments, possibly including a deputy to himself, or a new senior independent to replace Bob Scott, who chairs the remuneration committee. Scott, whose role also came in for criticism last week, is one of the longest servers, having joined in January 2001, but none of the board members is yet obliged to step aside under the Higgs code that defines nine years as the limit for membership.
That means McKillop has until 2010 to bring in new blood and the word from within is that it could be early next year before there is movement. Although three directors are expected to be appointed – from the US, Europe and Asia Pacific – it has not been decided whether they will be replacements or additions.
The expectation is that Goodwin, the main focus of recent attention, will at least see through the integration of the Dutch bank ABN Amro over the next 12 to 18 months which would take him up to and probably beyond 10 years' service, a considerably longer tenure than most chief executives.
He has been accused of running RBS on a wafer-thin capital ratio and pushing ahead with the acquisition of ABN at an inflated price, even when the real prize of LaSalle bank in America was snatched away, though some analysts believe this may have been the straw that broke the camel's back. One said: "The rot set in when RBS bought Charter One in America. The bank was run on a light capital base before Goodwin joined."
As events turned out last week, Goodwin was given the benefit of the doubt, not least from those who concluded there was no one better to lead the bank at this time, itself a source of criticism that RBS lacked a succession strategy common in even the smallest family firm. There are no known plans to reshape the top management by bringing in a deputy CEO or chief operating officer who may take on some of the growing bank's duties and be a natural heir to Goodwin.
Investors and analysts, particularly those who see the £12bn cash call as daylight robbery, are now looking to the next set of figures when the board is unlikely to be excused any reason for believing it has got away with what one shareholder described as "legalised larceny".
The board is, however, thought to be quietly pleased that it has secured first mover advantage, with Barclays and HBOS topping the list of those expected to find their own ways of plugging gaps in their balance sheets. Even so, there are distinct differences emerging from the banks in how to resolve their capital issues.
Analyst James Chappell at Goldman Sachs does not expect either Barclays or HBOS to go for capital raisings. Barclays' chairman Marcus Agius said at last week's annual meeting that the board had "options" that included organic management of the balance sheet.
But Chappell says any permanent impairment to earnings would make it difficult for either bank to avoid asking the market for cash. Agius, he noted, did not rule out a rights issue and Chappell believes Barclays may need £5bn and HBOS £4bn.
With RBS heading down the rights issue route, some believe other banks will want to avoid the risk of hitting a brick wall in a market that is not exactly flush with cash.
However, the weakness of all the banks' balance sheets have left their key tier one ratios – a core measure of their reserves – precariously low. The rights issue will lift the RBS ratio from just above 4% to above 6%, while Barclays' equity tier ratio is expected to rise from 5% to 5.25%. HBOS is now 5.7% and Chappell estimates it may write down £5.4bn so a £4bn injection would restore its equity tier one to 6.1%.
While attention will switch to Glasgow this week, where HBOS faces its shareholders, Goodwin will remain under the spotlight amid fevered speculation over who may buy RBS's insurance business.
The decision has been regretted by, among others, Peter Woods, the founder of Direct Line, and the company is not thought to be a willing seller. But with insurance escaping the worst of the credit crunch it represents a good opportunity to raise funds at a critical time. Goodwin said last week that there had been a number of enquiries.
But RBS has been in denial about selling the businesses for at least three months, despite rumours sweeping the City in early February that it was looking at including insurance among a batch of asset sales that also included Angel Trains, its leasing company, which should fetch £4bn.
Scotland on Sunday approached RBS in the first week of February to clarify its position on Direct Line and Churchill. Word had reached the paper that the bank had people working on a sale that would fetch £7bn, close to the £6.6bn price tag put on the division by analysts at Keefe, Bruyette and Woods on Friday. The note states: "We see a wide range of potential synergies, depending on the acquirer." It names a number of possible suitors, including AIG, Allianz, Aviva, Axa, Berkshire Hathaway, Generali, Mapfre, Royal & Sun Alliance and ZFS.
Aviva has ruled itself out, and another source says Prudential should not be overlooked. Its UK business has under- performed its Asian operations and, in one fell swoop, it could mop up 20% of the UK general insurance business if it acquired the RBS portfolio.
RBS Insurance underwrites a third of UK retail motor premiums, giving the owner the potential to change the outlook for this competitive sector. However, KBW notes that nothing will change the fact that UK retail motor business is ex-growth in terms of policy count; that RBS Insurance is already one of the most efficient underwriters and that the industry is one of the most commoditised in Europe.
Before synergies, it says only Axa and Generali can afford to pay above our £6bn price tag, and only Generali materially. After synergies, all bar Allianz, Mapfre and RSA can beat the £6bn, with Aviva joining Generali above £7bn. With Aviva ruling itself out before the note hit the streets, it still leaves a wide range of possible owners. RBS is said to prefer a sale of all the businesses – which also includes Privilege – or a stake. A third option is a break-up of the division. While this is the least favoured route, RBS's policy of retaining individual brands means they can be easily sold on.
KBW says RBS may choose to take none of these options. "Historically, we believe that RBS has considered its insurance arm a core part of its retail franchise in the UK. We do not believe, therefore, that bidders can rely on RBS being afraid to walk away from the entire auction process should bids not meet its expectations."
It may be that Goodwin is left with the insurance business on his books, but by then he will have his £12bn and the recent squall will have calmed down. Unless, of course, it gets worse.
The full article contains 1386 words and appears in Scotland On Sunday newspaper.
