RBS: The fear

Patrick Hosking

Royal Bank of Scotland (RBS) is by far the most damaged of the UK banks from the latest selling frenzy, its shares down by a teeth-gritting 39 per cent at their worst this morning. That may be partly down to speculation that the bank has taken a bath in the esoteric world of credit default swaps. It may be because of concern that RBS could still have some residual exposure to those bits of ABN Amro earmarked for Fortis, as its erstwhile partner in that ill-fated deal consortium implodes.

But the main reason is the fear that ordinary shareholders will be seriously diluted by the Government's putative plan to pump in capital in return for preference shares. RBS looks the keenest to clinch a deal, taking as much as £15 billion from taxpayers to beef up its balance sheet. That is rather more than the £12 billion raised from ordinary shareholders earlier this year.

There are precious few details about the mechanics of the bailout plan. But if government officials are using the Buffett-Goldman Sachs deal of last week as a template, then shareholders can expect to be at least partly wiped out. One theory is that either the preference shares will be convertible into ordinary shares at a favourable price, or they will come with warrants — basically options giving the Government the option to buy newly issued ordinary shares at a favourable price. There will be — and should be — huge pressure on ministers to ensure that taxpayers, if they have to shoulder this unwanted risk, at least share in the upside if RBS can be restored to health.

Either way, at the very best, ordinary RBS shareholders could be left waiting many years before they see a dividend again. And they could end up owning a relatively small chunk of the rescued bank.

Interest rates: Hands tied

Grainne Gilmore

Pressure is intensifying on the Bank of England to make a dramatic interest rate cut this month to shore up the economy and curb the spread of the financial turmoil into the wider economy. The CBI and British Chambers of Commerce are calling for a half point cut, as is the Federation of Small Businesses. But the Centre for Economic and Business Research (CEBR) is going further, calling for an emergency rate cut of 1 per cent. It also feels that waiting until Thursday may be a mistake. Instead it is demanding that rates be cut to 4 per cent tomorrow.

But economists say the likelihood of a 1 per cent cut is slim. True, Australia cut its rates by 1 per cent today but its central bank has a dual mandate - to focus on growth as well as inflation. The Bank of England's only mandate is too keep inflation at the 2 per cent target. Given that the rate-setting committee will have a copy of September's inflation figures, which are expected to have spiralled to more than 5 per cent, when it starts its two-day meeting, its ability to make a drastic rate cut will be curtailed. We won't see the inflation figures until next week. However, economists are not ruling out a half-point cut this week, and further cuts in the coming months to bring rates down to 4 per cent by the end of the year.

N Brown: In the pink

Nick Hasell

Like Great Universal Stores of old - the original Manchester-based home shopping group - N Brown has a remarkable knack of meeting its numbers through good times and bad.

Today’s first-half figures from the FTSE 250 company, which, with a stockmarket value of £640 million, is now bigger than Debenhams, HMV or WH Smith, were no exception. Pre-tax profits were up 20 per cent, with like-for-like sales ahead 12.6 per cent, despite strong comparative numbers last year. Neither is there any sign of slowdown in more recent trading: like-for-likes for the five weeks to October 4 were up 11.8 per cent. The only concern is that such gains have come partly at the expense of gross margins, which fell 0.8 percentage points.

As befits its reputation for prudence, N Brown is tightening its belt in the second half: it is keeping spending on attracting new customers flat and tightening its already stringent credit terms. To conserve cash, the interim dividend is also being raised less than earnings - by a modest 4.9 per cent.

With the shares having outperformed the FTSE all share index by 47 per cent over the last three months, the stock market has already priced much of that virtue into the shares. But at 217p, or 10 times current year earnings, they remain a relative safe haven in a troubled sector.

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