The bank admits that it has taken this action in light of the developments during March including the “severe and increasing deterioration in credit market conditions.”
It says there is an increased likelihood that credit markets could remain “difficult for some time”.
The rights issue is part of the group’s plan to implement revised targets for its capital ratios.
The revised targets are for RBS to maintain a tier 1 capital ratio of between 7.5 per cent and 8.5 per cent and a core tier 1 capital ratio in excess of 6 per cent.
The rights issue of £12bn are forecasted to result in a tier 1 capital ratio in excess of 8 per cent and a core tier 1 capital ratio in excess of 6 per cent at 31 December 2008.
RBS has also stated that while preparing the underlying capital forecasts, it has been assumed there will be write-downs additional to those reported in 2007. It says that the assumed effect on core tier 1 capital is £4.3bn net of tax and £4bn net of tax in estimated disposal gains.
Chairman Sir Tom McKillop admits this is a “difficult time” for the financial services industry, presenting RBS with specific challenges.
“Central to these has been the question of our capital ratios, which have been the focus of much attention, both internal and external, over recent months.
“It was the Board’s declared intention to rebuild our Tier 1 capital to the
middle to upper end of our historic range of 7 per cent to 8 per cent over a three year period, but in light of the current market environment, this level and timing are considered no longer appropriate.
McKillop says that in discussions with shareholders it was clear that many of them had reached a similar conclusion, hence today’s announcement of a rights issue.
“Naturally, shareholders wish to understand what we have assumed in relation to
the prospects for further write-downs and disposals of non-core assets, and
today’s announcement seeks to clarify the basis of our capital planning.”