This undertaking will analyze the ground why Bankss need to increase their capital and how they do so. It will utilize the instance survey of the NatWest Plc and RBS Group acquisition to exemplify the grounds and effects of acquisitions.
The purpose of this undertaking is to happen out the function that amalgamations and acquisitions play in increasing a bank ‘s capital. The undermentioned aims will assist to accomplish this purpose:
To understand what bank capital is and how it is measured
To happen out the grounds for increasing bank capital
To happen out how acquisitions benefits the purchasing bank.
What is bank capital?
A bank ‘s capital refers to its assets after its liabilities have been deducted. It shows how healthy and financially stable the bank is. There are ordinances to find what a bank ‘s capital lower limit demands are. These ordinances are set by the state ‘s finance authorization and by the Bank for International Settlements ( Basel Committee ) . National regulators normally work within the bounds of the Basel ordinances. Banks within these legal powers are expected to carry through these demands.
The Basel commission has set ordinances since 1988 called the Basel Accords. Up boulder clay day of the month, there have been three Basel Accords ; the 3rd one will come into consequence by the twelvemonth 2012. These Basel Accords propose the minimal capital demands and reflect what the planetary fiscal challenges are. Basel III is a response to the recent economic recession.
The Basel commission has defined bank capital into two ways: Tier 1 and Tier 2.
Tier 1: this covers the losingss that the bank can absorb without discontinuing operations. It refers to the bank ‘s equity capital and its disclosed militias. The equity capital is the money invested in the bank which the investors can non retreat. The disclosed militias are besides in the control of the bank. In other words, Tier 1 capital includes the nucleus capital that the bank has and is in complete control of.
Tier 2: this can cover losingss in instance the bank has to halt operations, therefore protecting investors. This includes general loss militias and unrevealed militias i.e. militias that are non included on the Bankss ‘s public paperss. The sum of Tier 2 capital allowed is no more than 100 % of Tier 1 bank capital.
Increasing a Bank ‘s capital
There are several grounds why a bank might desire to increase its capital. There are explained below:
In order to hold adequate capital to carry through minimal regulative demands: as already explained Bankss have to follow stipulated ordinances in order to avoid punishments or holding to discontinue operations. If a bank fails to run into the capital demands, it will necessitate to raise more capital.
To be able to defy unexpected operating losingss: the more capital a bank has, the more it will be able absorb any unexpected losingss. The Bankss face great hazards in the class of their operations. By default, they lend money to persons and Bankss and are ever exposed to recognition hazards among others.
To increase net income: a well capitalised bank has the possible to increase its net incomes. It can set about more investings, increase its portfolio and hence do more net incomes.
To spread out and turn the bank: every bank, so every administration, has to spread out and turn or it will neglect. Other Bankss will go on to turn their market portion thereby doing the bank less relevant and with fewer clients. Increasing its capital ensures that the bank will be able to spread out its operations and invariably increase its market portion.
Wayss of increasing Bank Capital
Increasing a bank ‘s capital can be done in assorted ways, two of the common ways are:
By selling portions: this is when more people are invited to purchase portions in the bank. It is one of the most traditional agencies of raising capital. Existing stockholders are besides encouraged to purchase more portions. Money raised from the gross revenues boosts the bank ‘s capital. For case, last twelvemonth Morgan Stanley and Wells Fargo sold more than $ 15 billion of portions and bonds to raise capital ( Felsenthal 2009 ) .
Amalgamations and Acquisitions: this is when the bank joins or buys another bank in order to take advantage of its already bing operations.
For the intent of this undertaking, the focal point will be on increasing capital by agencies of amalgamations and acquisitions.
Amalgamations and acquisitions
Amalgamations and acquisitions are a critical portion of any healthy economic system ( Sherman & A ; Hart 2005 ) . Businesss are bought or taken over by other concerns so that the economic system continues to turn. The ground behind amalgamations and acquisitions is the chase of increased profitableness. This is chiefly achieved by cost decrease in operations as a consequence of larger economic systems of graduated table and increased gross chances ( Schubert 2002 ) . Amalgamations and Acqusitions are two similar but really different constructs and are described below:
Amalgamations: in this instance, two or more companies combine to organize another company. It is normally done between companies of approximately equal standing where they both decide to fall in their concerns together to accomplish greater growing possibilities. In many instances, the companies ‘ names remain in the concerns, for case, Lloyds Bank and TSB Bank became Lloyds TSB Group plc ( Lloyds TSB 2010 ) .
Acquisition: the straight-out purchase of a works or even an full company. The company that was bought ceases to be on its ain and is absorbed by the purchasing company. Examples are RBS Group and NatWest Plc ( RBS 2000 ) .
Amalgamations and Acquisitions in Europe
During the 1990 ‘s there was a high addition in the figure of amalgamations and acquisitions in the European banking. Reasons for this include the debut of a new currency ( the Euro ) , deregulating, technological and fiscal inventions etc ( Ayadi & A ; Pujals 2005 ) . The figure increased from 326 in 1995 to about 500 in 1999. The entire value of the Amalgamations and Acquisitions during this period was about a‚¬262 billion ( Schubert 2002 ) .
In the UK specifically, this tendency has continued into the present. There were 52 acquisitions of UK companies by other UK companies in the first few months of 2010 entirely. This nevertheless, reflects all sectors non merely the banking sector. A important banking dealing was the acquisition of Standard Life Bank Plc by Barclays Plc ( ONS 2010 ) .
Figure 1. Diagram demoing the figure of UK acquisitions since 2006.
( Beginning: ONS 2010 )
Figure 2: Diagram demoing the sum of money spent on UK acquisition since 2006.
( Beginning: ONS 2010 )
The RBS Group Plc – NatWest Plc Acquisition
In order to to the full understand the acquisition procedure and its benefits, this undertaking will utilize the NatWest Plc and RBS Group acquisition as a instance survey.
The Royal Bank of Scotland ( RBS )
RBS is one of the companies of the Royal Bank of Scotland Group plc. The bank has several divisions including UK Personal ( retail, commercial banking and wealth direction services ) , UK corporate ( functioning SME and UK based multi-nationals ) , Insurance ( Direct Line, Churchill and Priviledge ) , US retail and Commercial banking through Citizens Financial Group ) and Europe and Middle East Retail & A ; Commercial Banking ( RBS 2010 ) . It soon has over 40 million clients all over the universe and 700 subdivisions in the UK entirely.
NatWest is now portion of the Royal Bank of Scotland Group. This has non ever been the instance. It came into being in 1968 when two Bankss ( National Provincial Bank and Westminster Bank ) merged. It expanded into other states and grew steadily to go UK ‘s biggest commercial bank. It has over 1,600 subdivisions across the state and over 7 million single clients and 850,000 little concern clients. It is besides present in Northern Ireland as Ulster Bank.
As described above, there are several grounds why a bank might make up one’s mind to increase its capital and specifically by acquisition. In order to understand the grounds behind the NatWest Acquisition, an analysis of the acquisition procedure and the Bankss ‘ capital before and after the acquisition will be carried out.
The Acquisition procedure
The generation of NatWest ‘s jobs started when it launched a friendly command for an insurance company called Legal & A ; General in September 1999. The command was for ?10.7 billion. NatWest Plc had hoped to diversify its portfolio by geting an insurance company. However, the market ‘s reaction to the command was non favorable. Its portion monetary value fell instantly by 26 % , an indicant that its stockholders did non believe that the move was appropriate ( Garfield 1999 ) .
Geting this portfolio meant that NatWest would be able to offer pension merchandises to their clients. David Prosser, the so L & A ; G head was really positive that NatWest would be able to duplicate its market portion in about three old ages. It appeared that the stockholders were non convinced and even though NatWest dropped its command for L & A ; G but it was already excessively late.
The autumn in portion monetary values prompted Bank of Scotland and subsequently RBS to do a hostile command for NatWest. There was an initial opposition, NatWest tried to downsize its operations and even unveiled a ?3.5 billion portion buy-back in order to get away being bought. In the terminal, it had to accept licking and RBS completed the acquisition in 2000.
Measuring the Banks ‘ capital adequateness
In order to analyze their capital adequateness, the Basel Accord computations will be used. Capital adequateness is measured in ratios ; capital adequateness ratio ( CAR ) and besides known as Capital to Risk Weighted Assets Ratio ( CRAR ) . This measures the ration of bank ‘s capital to its recognition, liquidness, involvement and operational hazards.
The hazard weighted assets is a step of the sum of a bank ‘s assets, adjusted for hazard. “ Entire risk-weighted assets are determined by multiplying the capital demands for market hazard and operational hazard by 12.5 and adding the ensuing figures to the amount of risk-weighted assets for recognition hazard ” ( Basel 2004 ) . Car is non permitted to be lower than 8 % .
Car is calculated in the undermentioned manner:
There is besides the Tier 1 Capital Ratio which is calculated as follows:
( Entire Tier I capital ) / Total weighted hazard assets. The ratio has to be at least 4 % .
Measuring the Capital Adequacy of NatWest Plc in 1999 before the acquisition.
The bank ‘s 1999 one-year study presented its figures as follows:
Entire Tier 1 capital: NatWest ‘s entire grade 1 capital was 8,938m in 1999, 8,048m in 1998 and 7,463m in 1997. There appeared to be a significant addition in capital over the three old ages. The ?890m addition between 1998 and 1999 was attributed to retained net income, issued staff portion options etc. ( Appendix 1 ) .
Entire Tier 2 capital: The bank ‘s entire grade 2 capital was ?7,258m in 1999, ?5,244m in 1998 and ?5,156m in 1997. There were besides increases in the entire grade 2 capital over the three old ages. The ?2 million addition between 1998 and 1999 was due to subordinated debt capital raised during the twelvemonth ( Appendix 1 ) .
Weighted hazard assets: It was ?97.2b in 1999, 96.4b in 1998 and 103.2b in 1997. This besides increased by ?0.8bn ( 1 % ) from 1998 to 1999 ( Appendix 1 ) .
Calculating NatWest ‘s CAR for the twelvemonth 1999:
( ?8,938 m + ?7,258m ) /97.2b = 16 %
1st tier capital ratio:
?8,938/?97.2 = 9 %
It is clear from these figures that NatWest Plc met the minimal capital demands of the Basel Accord. The bank was adequately capitalised and hence immune to put on the line exposures. In world, it did non halt it from being taken over sharply by RBS. The events environing the coup d’etat of NatWest show that the volatility of market response to banking determinations is non needfully covered by equal capital demands.
Measuring RBS Group ‘s Capital Adequacy before the NatWest Acquisition
To find RBS ‘ capital adequateness, its one-year study of 2000 will be examined. The study published the undermentioned fiscal figures ( appendix 2 ) :
Tier 1 capital: ?12,071m
Tier 2 capital: ?10,082m
Weighted Risk Assets: ?175,200m
CAR = ( 12071+10082 ) /175,200 = 11.5 %
Tier 1 capital ratio: 12071/175200 = 6.9
RBS Group Plc after the NatWest Acquisition
It is clear that the ground behind the RBS -NatWest acquisition was non because NatWest or RBS were falling behind with the capital demands. Therefore, the undertaking will now analyze RBS Capital Adequacy after the event to happen out the ground for the acquisition.
RBS Group Capital Adequacy:
RBS attempted and succeeded in taking over NatWest because it wanted to increase its capital and finally increase its net incomes. This is apparent from its 2001 one-year study. RBS fiscal figures in the study showed that it was able to increase its tier 1 ratio as a consequence of the acquisition while its capital adequateness ratio remained the same.
Calculating RBS ‘ Capital Adequacy Ratio after the Acquisition:
Tier 1 capital: ?15,052m
Tier 2 capital: ?11,734m
Weighted Risk Assets: ?210,500m
Car: ( 15052 + 11734 ) /175200 = 11.5 %
Tier 1 capital ratio = ( Total Tier I capital ) / Total weighted hazard assets.
Tier 1 Capital ratio: 15052/210500 = 7.1 %
Harmonizing to this study, RBS Group ‘s policy is to invariably keep a strong capital base and to spread out that capital base whenever appropriate. It besides reported that the capital will be expeditiously used to increase and bring forth a greater return on investing for the stockholders every twelvemonth. It was besides interested in utilizing its capital providentially and maintaining its hazard to plus ratio sensible as expected by the fiscal ordinances ( RBS 2001 ) . These statements show that the RBS ‘s enlargement and acquisition of NatWest was as a consequence of it capital enlargement policy and its policy to increase stockholders ‘ net income.
NatWest Plc doubtless brought an addition in RBS ‘ capital. Tangible assets that NatWest brought to RBS Group include Freehold Premises worth ?2,176 million, long leasehold premises deserving ?287 million, short leasehold premises deserving ?463 million, computing machines and other equipment worth ?3,128 million and assets on operating rentals deserving ?3, 567, doing a sum of ?9,621 million worth of touchable assets ( RBS 2001 ) .
Intangible assets include the extra good will of ?93 million brought to RBS Group through the acquisition of NatWest Plc ( RBS 2001 ) .
There was besides a excess of ?1,070 million amortised from the NatWest Pension Funds. Besides, the bank was able to pay out its first dividend on the Additional Value Shares in connexion with geting NatWest Plc. The value was 15.0p per portion.
As a consequence of increased capital, RBS Group was able to increase its net incomes to record degrees. Increased dividend was covered at 3.3 times by net incomes before goodwill amortization ; integrating costs extra value portions ( AVS ) dividends. Stockholders ‘ financess at December 2000 were ?27,620 million ; a ?4,504 million lb addition from the old twelvemonth. Net incomes per portion after all the necessary accommodations increased by 25 % to 127.9p. The study besides showed that the Bank was able to accomplish cost nest eggs and increased gross chances from the NatWest acquisition and it intended to go on its acquisitions and work with other concerns in joint ventures ( RBS 2001 ) .
Since the acquisition, RBS has continued to turn. As expected, increase in capital gives a bank the chance to set about more investings. Its last one-year study for the twelvemonth 2009 ( appendix 3 ) shows the undermentioned figures:
Tier 1 capital: ? 62898m
Tier 2 capital: ? 12987m
Weighted Risk Assets: ?438200m
CAR = ( 62898+12987 ) /438200 = 16.3 %
Tier 1 capital ratio: 62898/438200 = 14.4 %
The Present Organisational Structure of RBS
RBS Group Plc has been able to successfully incorporate NatWest into its concern operations as seen in chart in figure 4.1. It organises all its retail and commercial banking activities through RBC Plc. The group chart shows that NatWest is managed under the RBS Plc, together with Tesco Personal and RBSG International. Under NatWest are its usual operations and units ; Coults & A ; Co now known as RBS Coutts and Ulster Bank Ltd.
NatWest still plays a strategic function within RBS group. It has retained its retail trade name and its SME concerns trade name. Therefore even though it is wholly owned by RBS, its clients are still being serviced under the NatWest trade name. By leting NatWest services to go on to run usually, RBS plays to the strength of its new acquisition and the success can be seen from its current fiscal figures ( see Appendix 3 ) .
Together RBS and NatWest have a web of over 2,200 bank subdivisions and over 4,500 ATM ‘s in the UK. In Ireland, Ulster Bank has 300 subdivisions. And by the terminal of 2004, RBS Group had over 136, 500 employees ( MIS 2005 ) .
Figure 3. The present construction of RBS.
Issues faced during the RBS- NatWest Acquisition:
Every amalgamation and acquisition has its ain challenges because the two companies operations, systems and people have to be integrated successfully. RBS Group was under great force per unit area to guarantee a smooth and speedy integrating procedure because it promised to obtain great cost nest eggs and derive greater gross from the operations of both Bankss. In order to accomplish this, it divided the procedure into 154 enterprises and aimed to finish the procedure within 3 old ages. The cardinal things it aimed to accomplish were, to utilize RBS information systems as the lone platform for operations, to reassign NatWest clients and informations to the systems in merely one weekend and to cut down staff by 18,000 ( Kennedy et al 2006 ) .
RBS was able to accomplish its marks on clip but the major job it faced was the gyrating cost of the integrating. In add-on to the ?21 billion spent during the coup d’etat. Integrating the companies ‘ systems, procedures and staff cost RBS ?434 million in 2000 and ?847 million in 2001. The full integrating procedure was expected to be ?5.5 billion which is higher that the ?4.1 billion already planned. On the positive side, RBS reported that nidation has been quicker than expected and extra value has been identified from the acquisition with an addition of ?300 million one-year benefits ( RBS 2001 ) .
This undertaking has explained the demand for Bankss to hold equal capital in order to carry through fiscal ordinance demands, to increase investings and give more net incomes. One of the agencies of increasing bank capital is through a successful amalgamation or acquisition. The RBS- NatWest was used as a instance survey to understand the acquisition procedure, the ground behind and the benefits.
RBS and NatWest were both good capitalised Bankss but due to a hapless concern determination by NatWest, RBS was able to establish a hostile command for it. This undertaking has used the Basel capital adequateness ratio to step and cipher the impact of the acquisition on RBS. It discovered that the acquisition enabled RBS to greatly increase its capital and accordingly increase its net incomes thereby warranting the NatWest coup d’etat.
Rubidium set up a really elaborate and comprehensive procedure to incorporate the Bankss. The procedure cost RBS more money than it planned but the integrating was a success. The RBS- NatWest acquisition has shown that increasing a bank ‘s capital through successful amalgamation or acquisition has a positive consequence on the purchasing bank.
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A snapshot of NatWest 1999 one-year Report
A snapshot of RBS Group Plc 2001 one-year study