Investors find record RBS cash call hard to swallow : US Business

By Daisy Ku and Laurence Fletcher

LONDON (Reuters) - Investors reluctantly came to terms with Royal Bank of Scotland's giant 12 billion pound ($23.7 billion) rights issue, amid concerns there might be more bad news to come from Britain's second-largest bank.

The biggest-ever rights issue, designed to cover increased writedowns on the value of toxic assets and to repair RBS's balance sheet, marks an embarrassing U-turn after the bank said earlier this year it did not need to raise capital.

"It's a massive rights issue but I'm not necessarily sure it covers all the cracks," said Paul Branigan, chief investment officer of Premier Asset Management, who sold out of Royal Bank of Scotland last year.

"It doesn't look like they have kitchen-sinked it ... there could still be more to come."

A London-based fund manager who requested anonymity said: "I found this hard to stomach. Only seven weeks ago, RBS stated its confidence in a strategy that would see its capital ratio returning to a normal level over a three year period. And now the bank reveals such massive writedowns."

With the rights issue and asset sales, RBS's core tier one capital ratio will rise to more than 6 percent by the end of 2008 from 4.5 percent, one of the lowest in Europe, at the end of 2007.

"(Chief Executive) Sir Fred Goodwin justifies continued support. However, he has to fully engage with his shareholder base and a strengthened non-executive board to maintain that support," said David Cumming, head of UK equities at Standard Life investments, which holds 3.5 percent of RBS.

The bank's chairman said Goodwin and other executives had the board's support.

"I think some shareholders are quite cross about it ... (But) the market seems to have accepted the issue, another shareholder said."

However, concerns remain about the bank's valuation, the gloomy outlook for the UK banking sector, and whether RBS will announce more bad news.

The rights issue is massively earnings dilutive, leaving the bank on 7.6 times forecast 2008 earnings, based on the ex-rights price of 307p per share.

This is at a premium to domestic peers Barclays , which is on 6.7 times, and HBOS on 5.5 times, but at a slight discount to Lloyds , on 8.3 times, and Alliance & Leicester on 8.6 times.

RBS on Tuesday announced 5.9 billion pounds of writedowns before tax, on top of 2.4 billion pounds announced last year. It said the scale of its latest markdowns was conservative.

RBS's credit ratings came under pressure, with Fitch Ratings cutting one notch to AA and Moody's Investors Service warning it could strip the bank of its Aaa rating. Standard &Poor's said it maintained a negative outlook on the bank.

(Additional reporting by Richard Barley; Editing by Erica Billingham)

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