RBS bailout: what does it mean for you?
The government has been forced take a 58% stake in RBS after shareholders rejected the banking group’s £15 billion share offer. In a statement, RBS said that only 0.24% of new shares offered to investors were taken up, leaving the government – and the taxpayer – to pick up the remaining 22.9 billion shares and take control of 57.9% of the bank.
Shareholders had little incentive to buy the new shares in RBS as they were trading at 55.10p on the run up to the cash call – well below the offer price of 65.5p. The bank will now receive a total of £20 billion from the taxpayer, made up of £15 billion in ordinary shares and £5 billion in preference shares.
"We regret that existing shareholders did not take up their pre-emptive rights but understand that market sentiment towards the banking sector made this uneconomic in the short-term," Stephen Hester, the new chief executive of RBS said.
The sale of shares in RBS is part of the government's £37 billion bailout of banks who have been hit hard by the credit crunch.
But what does it mean for you and your finances?
If you are a shareholder...
According to Darius McDermott, managing director of Chelsea Financial Services, the biggest losers from deal will be the bank’s existing shareholders. “Those shareholders that chose not buy the shares at 65.5p will have their shareholding diluted,” he says.
Gavin Haynes, managing director of Whitechurch Securities, agrees: “This dilutes the ownership of the bank, and as shareholders don’t own as much of the bank anymore, any future profit that the bank makes will also be diluted.”
But it seems like a price that shareholders are willing to pay. At the bank's AGM in November, 99% of shareholders voted to take part in the government's bailout, meaning the bank lost the ability to set executive pay and paying dividends.
But accepting government support will hit existing shareholders, who will not receive any dividends until the bank has at least bought back the £5 billion worth of preference shares back from the Treasury. “Shareholders will hope the bank concentrates on paying this off quickly,” says McDermott.
Shareholders have little choice now but to hope that the new chief executive of the bank, Stephen Hester, is up to the task. Hester says RBS must put the past behind and move forward with a clear focus.
“Our mission is to serve the interests of all our shareholders, large and small,' he said in a statement. “We will succeed only by serving our customers well. This business reality is one we take seriously. There remain substantial uncertainties and challenges outside our control but for our part the job is underway."
Despite the downside to the bailout, McDermott says that having the government on board as a majority shareholder will help bring some immediate stability back to the bank.
What about taxpayers?
As majority owners of the bank, taxpayers may feel aggrieved that they have been forced to prop up the troubled bank. Shares in RBS had fallen to 52.5p in early trading, giving taxpayers a paper loss of over £2.6 billion on the purchase alone.
"Taxpayers didn’t ask for the shares, but the only alternative was to let it go bankrupt, so the government had to act,” says McDermott.
The government's shares will be held by the newly-created company called UK Financial Investments. The government has said that it will is maximise value for taxpayers without having to get directly involved with the bank’s day-to-day operations.
However, as the sale of the shares are not expected until markets recover, it could mean taxpayers end up owning a majority stake in the bank for several years to come.
"Taxpayers now own a very large stake of the bank,” says Haynes. “As such we must hope that the bank is run prudently.
"But there are so many uncertainties. The bank may require more cash further down the line, so how long it takes before the bank is in profit again is anyone’s guess.”
On a positive note, McDermott believes that taxpayers could end up in profit from the deal.
“Taxpayers could do very well from this arrangement over the medium to long-term," he explains. "When the bank starts making money again, the government will exit its position and we will all see the benefit.”
In the coming weeks both Lloyds and HBOS will ask shareholders for £13 billion worth of new shares. Should they choose to snub the offer, the government will be forced to step in again.
However, having a major stakes in these banks could be good news for borrowers and small businesses alike.
“If the government is a majority shareholder, if it says start lending then banks have to start lending,” says McDermott. “Banks have been making it very difficult for those wanting a mortgage, or businesses wanting a bigger overdraft, so it could in fact increase competition.”
If you are a customer of RBS...
Cash-strapped mortgage customers have seen the first benefit of the bailout. With the government keen to keep people in their homes, the bank has announced that struggling RBS or NatWest borrowers now have a six-month period of grace before repossession proceedings begin.
Announcing the move, Craig Donaldson, managing director of retail banking, said the guarantee would apply to all customers of RBS and NatWest and be valid until at least the end of next year.
“We hope that our commitment will reassure our customers that we are committed to providing them with enough time, professional support and the assistance they need to resolve their financial difficulties.”
All other current account, savings and mortgage customers shouldn’t be too affected by the deal. From RBS's point of view, it is business as usual and that means it will continue to look after existing customers and bring in new customers.
If you are a saver with RBS, then remember your money is only protected up to £50,000 by the Financial Services Compensation Scheme. You can find out more about how protected your savings are here.
"The majority of existing customers with RBS and Natwest will remain relatively unaffected by the deal," says Kevin Pattinson, a partner at P&P Invest. "The problem for shareholders is that because the government has bought into the bank in such a big way there is a possibility that it could end up being nationalised. Hopefully it won't come to that."
Nevertheless Pattinson explains that the bank is now in a much stronger position: "It will take time, perhaps two to three years for the bank to restructure and for confidence to return. But hopefully the corner has been turned."
“We are doing everything we can to look after all of our existing customers, particularly small businesses,” said a group spokesperson.
Following concerns that banks might leave small businesses out in the cold, RBS recently decided to freeze overdraft charges for its business customers for at least a year from 1 December.
Peter Ibbetson, chairman of small business for RBS, said at the time: "The bank fully recognises that one of the biggest worries facing small businesses is the increase in the cost of borrowing and we believe this move will reassure our customers that the bank is committed to supporting them.”
UK Financial Investments
The UKFI was established on 3 December 2008 to manage the government’s investments in financial institutions, including the Royal Bank of Scotland (RBS), Lloyds TSB/Halifax Bank of Scotland (Lloyds Banking Group), Northern Rock and Bradford & Bingley. The aim of UKFI is to protect the UK taxpayers’ investment in these companies and to help the companies “create value” so the government’s shares in these companies can be gradually sold back into the market at a profit. As an idea to how big an exposure the UK taxpayer has, if the government’s stake in these banks falls 1%, this is equivalent to the annual defence budget of £37bn and a 3% fall is the NHS budget of £110bn.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Every limited company must hold an annual general meeting for its shareholders once a year to consider the company’s accounts, reports of directors and auditors and it is the only opportunity for shareholders to express their feelings to the board of directors. Shareholders also vote on the appointment/re-appointment of directors, although this may be sent to shareholders as a postal ballot.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.