RBS prospectus

I've been scrutinising the RBS prospectus for its placing and open offer, and trying to decide whether (and to what extent) to participate.

I don't think it's possible to simply read a bank's financial statements and come to a positive or negative conclusion, but thinking laterally may prove enlightening. So what conclusions can we come to?

Stephen Hester has hinted strongly that RBS may make a full-year loss, although I think he may be setting expectations low so that he can pull a trivial profit out of a hat to great acclaim. Let's assume they break even.

So - after possibly the greatest financial crisis the world has seen, RBS has one lean year. RBS has been forced to raise a lot of capital - but that money has actually boosted RBS's capital, it hasn't been swalled by subprime losses. RBS has successfully funded some massive losses out of profits - RBS was not in danger of running out of capital, but was in danger of running out of cash.

So what's different at the end of this year to the end of last year? RBS will have an 8% core tier 1 ratio. RBS will have access to plenty of liquidity. RBS will have regained the confidence of the financial community (i.e. have lower CDS spreads). Balanced against this, there is clearly a worsening economic climate.

Personally I think a recession can be dealt with. Yes, RBS will face problems from commercial property loan default, counterparty failure, sovereign debt default, further writedown in asset-backed securities, leveraged-loan default and rising impairments. But the recent changes to IAS 39 allow RBS to reclassify loans out of the held-for-trading category, which allows it to take losses as they come, rather than all at once. Hopefully RBS can continue to trade profitably, and cover writedowns out of profits rather than taking substantial hits to capital.

There's an interesting article at FT Alphaville that takes the opposite view:
http://ftalphaville.ft.com/blog/2008/11/04/17780/the-royally-rendered-bank-of-scotland/
I agree it's quite scary. But I think they're being a little bit one-sided.